Small Signals, Big Shifts: Micro Indicators during Recession

INTRODUCTION

While traditional economic indicators like GDP, inflation rates, and unemployment figures provide a macro-level overview of economic health, they often miss the subtle, ground-level shifts in consumer behavior. Microeconomic indicators, such as the Lipstick Effect, Underwear Index, Big Mac Index, Ramen Noodle Index, and Haircut Index, offer alternative, often quirky lenses to detect economic trends. These indicators are rooted in everyday choices and low-cost consumption patterns that respond quickly to financial uncertainty. For instance, during economic downturns, sales of affordable indulgences like lipstick or instant noodles tend to rise, while discretionary purchases like high-end clothing or salon treatments may decline. Understanding these indicators can provide unique, early insights into public sentiment and spending behavior before traditional statistics catch up.

In a world where numbers alone can’t capture the nuances of economic behavior, micro indicators offer a window into the real lives, emotions, and choices of everyday consumers.

1. Early Warning Signals: Micro indicators like lipstick or ramen sales often shift before official economic data, signaling changing consumer confidence.

2. Consumer Psychology Insights: Spending on small luxuries or delaying non-essentials reflects how people emotionally adapt to financial stress.

3. Global Comparisons Made Simple: Indexes like the Big Mac Index provide relatable, real-time snapshots of purchasing power and currency value across countries.

LIPSTICK EFFECT

The Lipstick Effect, first introduced by Juliet Schor in The Overspent American (1998), describes a phenomenon where consumers, during economic downturns or personal financial strain, continue to spend on small luxury items like premium lipsticks, even while cutting back on larger, more expensive purchases. This behavior is linked to the income effect, where demand shifts in response to changing income levels. As incomes fall, consumers tend to substitute big-ticket luxury goods with affordable indulgences, making items like cosmetics, fast-casual dining, and movies more resilient during recessions. The effect also reflects psychological coping: when unable to afford significant luxuries, people still seek small treats to lift their spirits. Additionally, in tighter labor markets, individuals may increase spending on appearance-enhancing products, such as cosmetics, to maintain a competitive edge in job seeking.

Leonard Lauder, chairman of Estée Lauder, observed a spike in lipstick sales after the September 2001 terrorist attacks. This led him to propose that lipstick acts as a counter-cyclical economic indicator.

Fig.1: Sales of Estée Lauder during 2006-13, with a significant rise during the recession year (Source: Annual Report (2006-13) of Estée Lauder)

In September 2020, Uma Talreja of Shoppers Stop noted a 33% rise in eye makeup sales post-COVID, making it the top volume driver. Sephora India CEO Vivek Bali reported similar growth in eyeliners and mascaras. Tapping into the "lipstick effect," the company is promoting affordable hair color, believing women may shift focus from lipsticks, now hidden by masks, to hair coloring as a form of self-expression.

UNDERWEAR INDEX

Alan Greenspan, former Chairman of the Federal Reserve (1987–2006), was known for tracking unconventional indicators to assess economic health. One such indicator was the Men’s Underwear Index (MUI), based on the idea that underwear, being a basic necessity, is less influenced by trends and more by real shifts in consumer confidence. The theory suggests that during prosperous times, men are more likely to purchase new underwear, while in economic downturns, they may delay such purchases, treating them as deferrable. This pattern reflects broader changes in consumer spending, which is a major driver of economic activity. During the Great Recession, for example, underwear sales declined notably, aligning with reduced consumer confidence. While quirky, the MUI has shown some validity over time. However, it isn’t a standalone tool and should be considered alongside traditional indicators like GDP, employment data, and inflation for a holistic view of the economy.

Fig. 2: Sales of Calvin Klein (Source: Annual Report of PVH Corp.)

In India, Page Industries (Jockey India) offers a compelling case study of this effect. Between 2008 and 2009, during the height of the global financial crisis, the company’s sales growth rate slowed from 37% to 27% (Source: Annual Reports of Page Industries). Though the company continued to grow, the deceleration reflects a cautious shift in consumer behavior, consistent with the Underwear Index logic, consumers delayed non-urgent purchases amid economic uncertainty.

BIG MAC INDEX

The Big Mac Index, created by The Economist in 1986, is a lighthearted tool to illustrate purchasing power parity (PPP) by comparing Big Mac prices across countries. PPP suggests that exchange rates should adjust so identical goods cost the same globally. Since Big Macs are largely standardized, they serve as a simple benchmark, unlike typical grocery baskets that vary by country. While not meant as a precise economic measure, the index shows currency misalignments. For instance, in 2024, the British pound was undervalued by 3.61% against the U.S. dollar, with Big Macs priced at $5.69 in the U.S. and £4.67 in the U.K., implying an exchange rate of 0.75 versus the actual 0.78. The index, now covering 54 countries, reveals high prices in Switzerland and low ones in places like Indonesia and India.

Fig. 3: Price of Big Mac in respect to the Countries Fig. 4: No.of Big macs you can buy with AMS

The Big Mac Index indicates that the Indian rupee is heavily undervalued, by about 43.3% against the US dollar, suggesting that goods in India are much cheaper than in the US, which could enhance the appeal of Indian exports to American buyers.

Observation	Economic Insight
Cheaper Big Mac (undervalued currency)	Country’s goods are cheaper – could boost exports
Costlier Big Mac (overvalued currency)	Goods are expensive – might hurt exports
Changes over time	Inflation, cost of living, labour productivity trends

CONCLUSION

In times of economic turbulence, the loudest signals often emerge from the quietest corners. As this report has demonstrated, microeconomic indicators like the Underwear Index, Lipstick Effect, and Big Mac Index provide more than quirky trivia, they offer real-time, relatable, and culturally adaptive snapshots of consumer sentiment and economic health. The Indian case of Page Industries (Jockey India), where a dip in sales growth during the global financial crisis aligned with the Underwear Index logic, proves that such indicators transcend Western economies and hold value in diverse markets. Similarly, the rise in cosmetic purchases post-2008 and during the COVID-19 recovery reinforces the psychological role of small indulgences during financial stress. In a world saturated with big data and macroeconomic jargon, these "small signals" act as early warnings, or quiet affirmations, of broader economic shifts. They remind us that understanding the economy isn't just about GDP or interest rates, but about the everyday choices people make at supermarkets, malls, and salons. By tuning into these subtle indicators, policymakers, economists, and businesses can better anticipate changes, adapt strategies, and empathize with the emotional landscape of consumers. After all, it’s not just markets that move, people do.

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Rewa is an Analyst at IFSA Hansraj

Rajat Soni is an Analyst at IFSA Hansraj

Ashwin Chhabra is an Analyst at IFSA Hansraj

REFERENCES

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World Population Review. (n.d.). Big Mac Index by Country. Retrieved from https://worldpopulationreview.com/country-rankings/big-mac-index-by-country

Business Standard. (2023, January 27). Big Mac index suggests rupee is undervalued by over 40% relative to dollar. Retrieved from

https://www.business-standard.com/article/finance/big-mac-index-suggests-rupee-is-undervalue d-by-over-40-relative-to-dollar-123012701063_1.html

Índice Big Mac. (n.d.). In Wikipedia. Retrieved from https://es.m.wikipedia.org/wiki/%C3%8Dndice_Big_Mac