Lipstick effect

While traditional indicators like GDP figures and unemployment rates provide valuable data, they often feel distant or difficult to interpret. Surprisingly, something as simple as lipstick sales might offer an alternative, more relatable insight into how the country is doing.

In 2001 an executive at Estée Lauder analysed customer behaviour following both 9/11 and the dot-com crash. Leonard Lauder, was the first to suggest that lipstick sales could serve as a surprising indicator of the overall health of the economy. Just not in the way you think. 

At first glance, you might expect lipstick sales to rise when the economy is strong, with more disposable income circulating. However, the opposite is true. In reality, lipstick sales tend to spike during economic downturns, a phenomenon that seems counterintuitive. Lipstick becomes a small luxury that people turn to when times are tough. 

Nothing in our economy exists in isolation. We don’t operate in a sterile lab where only one variable affects the outcome. Every purchase we make involves trade-offs. For example, buying a burger means choosing not to buy a steak. The same principle applies to lipsticks and everything else we spend money on. This concept is known as opportunity cost. When we buy one thing, we forgo another. Regardless of how wealthy someone is, resources are always limited and money really doesn’t grow on trees.

People have a desire to consume, regardless of whether the economy is booming or struggling. When times are tough, that desire doesn’t disappear, but disposable income does. As budgets tighten, consumers shift their spending—opting for smaller, more affordable indulgences. Instead of splurging on a designer handbag, they buy lipstick. People still treat themselves, but in a way that aligns with their new financial reality.

At the heart of the lipstick index is the idea that economic downturns create uncertainty about the future. As a result, consumers hold back on large purchases but still seek ways to indulge. Instead of buying luxury goods, they opt for more affordable alternatives. This behaviour is formally known as the substitution effect, where consumers replace more expensive items with cheaper options during tough economic times.

This also explains why fast food restaurants and movie theatres tend to perform well during recessions. While many assume that fewer people visit cinemas during tough economic times, the opposite is true. Cash-strapped consumers may not be able to afford a five star restaurant, so they opt for a night out at the movies instead. This is the same economic principle that Lauder observed with lipstick sales. As budgets tighten, consumers adjust their spending to match their means, More affordable goods, often referred to as ‘inferior goods’, benefit from this shift.

Unfortunately for casual investors and amateur economists, lipstick sales data is not usually publicly available. There’s no government agency reporting how well Estée Lauder’s red lipstick sold this month. While the index is rooted in solid economic theory, it’s unlikely to provide timely insights for regular investors. Despite this limitation, a country’s lipstick consumption can indeed predict its downfall.