Is the "Lipstick Index" Hinting at a Recession?

As the U.S. economy shows signs of slowing, economists are looking to an unlikely indicator to gauge the health of consumer spending - lipstick sales. The so-called "lipstick index" was first coined by former Estée Lauder chairman Leonard Lauder during the economic downturn following 9/11, and it suggests that cosmetics purchases, especially lipstick, can be a barometer of economic sentiment.

The theory goes that during tough times, consumers may cut back on big-ticket purchases but still indulge in smaller "affordable luxuries" like lipstick. In the aftermath of 9/11, U.S. lipstick sales jumped 11%, and during the Great Depression, overall cosmetics sales increased by 25%. More recently, in 2020 at the height of the COVID-19 pandemic, Estée Lauder's CEO said the "lipstick index" had been replaced by a "moisturizing index" as consumers focused more on skincare while working from home.

Now, as the post-pandemic spending boom appears to be winding down, the lipstick index may be rearing its head once again. Data from consumer research group Circana shows that prestige beauty sales - often higher-end cosmetics and skincare products - grew 9% in the first quarter of 2024, outpacing mass market beauty which only grew 2%. Meanwhile, beauty retailer Sephora recently reported a record sales year.

"The lipstick index is a less technical - and more fun - measure of economic downturn, but it's something worth exploring," says Neela Montgomery, CEO of the premium cosmetics collective Overeon. "As consumers start to pull back, they may still be willing to spend on small indulgences like luxury beauty products."

Of course, the lipstick index isn't a perfect predictor - it's just one data point in the broader economic picture. But with rising interest rates, high inflation, and concerns about a potential recession, it's a trend that's worth watching closely.

For investors and brands, understanding consumer behavior during economic uncertainty could be key. Beauty companies that can tap into the "affordable luxury" mindset may be better positioned to weather a downturn. And savvy investors may want to keep an eye on the lipstick index as a potential leading indicator of shifts in consumer sentiment.

Ultimately, the state of the economy is complex, with many moving parts. But the humble lipstick just might hold some clues. As the saying goes, "the devil is in the details" - and in this case, the details may be on our lips.

Readers, what are your thoughts on the lipstick index and its potential implications? Share your insights in the comments below or head over to https://www.buymeacoffee.com/JusticePretorius to continue the conversation.