What is the lipstick indicator?

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­Consumer spending isn't a fixed metric that economists can rely on when tinkering with the market. Instead, when budgets shrink, expenditures often follow in suit. For example, when the economy sours, people are more likely to stock up on nonperishable foods, such as rice and canned vegetables. When we're back in the black, it's time for fresh meat and desserts. By understanding what consumers are willing to sacrifice, as well as the small luxuries that help them weather financial storms, economists can better predict how and when the market may rebound.

One of the primary ways analysts predict that spending behavior is through the Consumer Confidence Index (CCI). The rosier the outlook on nationwide employment, income and savings, the more confidence we have in the market to protect our assets --and the more money we're likely to spend and invest. The nonprofit Conference Board prepares the monthly CCI based on a survey of 5,000 representative U.S. households. From that, investors have a clearer picture on where to buy and sell stock, and the Fed can adjust interest rates to woo consumers.

Today, analysts are paying especially close attention to consumer behavior. Unemployment rose to 7.2 percent in December 2008 and could escalate to 9 percent by 2010 if the current trends continue [source: Rampell]. Rampant foreclosures, higher food costs and diminishing retirement savings have compounded the public's angst. In January 2009, the CCI bottomed out at the lowest level ever [source: Mantell].

­But economists don't rely solely on the CCI for consumer data. They also look out for specific goods and industries that yield higher profits during market decline to get a sharper picture of what's going on with consumers. Want one such estimate of consumer confidence these days? Ask a woman about the last time she bought a tube of lipstick.

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One Depression-era pattern in female spending that hemline hawk George Taylor didn't take note of was the 25 percent increase in cosmetics sales [source: Economist]. When a similar spike occurred during the economic doldrums of 1990 and 2001, this type of consumer behavior didn't elude Leonard Lauder, chairman of Estee Lauder Companies, which manufacture the cosmetic lines Estee Lauder, Clinique and MAC.

Lauder took particular interest in the rise in lipstick purchases. In the fall of 2001, when the economy buckled after the Sept. 11 attacks, Estee Lauder lipstick sales jumped 11 percent [source: Economist]. That trend in discretionary (or nonessential) spending has become known as the lipstick indicator.

When women can't afford pricier indulgences, Lauder mused, lipstick offers a cheaper compromise. If a woman aches for a new Chanel handbag that far exceeds her budget, opting for a $30 tube of Rouge Allure lipstick in limited-edition Violet Diamond may feel like a thrifty shopping decision. Also, women who wear lipstick probably reapply at least a few times per day. Such instant gratification can ease the urge to shop more [source: Schaefer].

But recent buying trends have smeared the lipstick indicator's validity. Sales of lipstick in the first quarter of 2008 were down 3.3 percent for supermarkets and drugstores and 13 percent in department stores [source: Schaefer]. A comparison of the U.S. Gross Domestic Product and lipstick sales from 1989 to 2007 reveals few parallel paths [source: Economist]. Even when the economy sings, lipstick sales have risen. Just like the fatal flaw of the hemline index, lipstick's popularity ultimately rests with fashion trends, not the stock market.

Instead, some market researchers have suggested expanding the lipstick index to include all beauty products. Historically, female consumers haven't abandoned their beauty regimens completely in bad economies; they simply may not prefer to wear lipstick. For instance, L'Oreal posted year-over-year sales growth of 5.3 percent in 2008 [source: Elliot]. At the same time, the number of new Avon representatives rose 5 percent, along with a 13 percent revenue increase in the third quarter [source: Avon].

­Male spending hasn't escaped economic microscope, either. The necktie index has emerged once again -- but this time, it's about sales rather than style. Similar to the lipstick theory, the revamped necktie index speculates that more men are donning ties in the workplace for an inexpensive self-confidence boost while this economic knot loosens up [source: Friedman].