EconomyHow many ways are there to know if we...

How many ways are there to know if we are in a recession?

(Expansion) – The short answer to the question in the title of this column is naturally only one, which is when the economy contracts in a general and sustained manner for at least two consecutive quarters, and that not only implies a decrease in the Domestic Product Gross Income (GDP), but it also manifests itself in other ways such as job loss, lower income for households, or lower level of industrial production.

The formal definition provided by some economists such as Rudi Dornbusch or Stanley Fischer to describe this phenomenon (apart from the methodological or conceptual debates), is the cyclical bottom where the minimum point of economic activity is reached.

There are other indicators that do not exactly measure the volume of economic activity, but which are used formally to guess if activity is contracting, some of which are related to the housing sector, construction or productive investment.

However, the long answer to the same question is that there are other alternative indicators to know if the economy is in recession, which although they have not been explored with sufficient empirical rigor nor are they generally accepted among the economic community, they do call the attention for being quite unusual and even funny.

One thing these indicators have in common is that they focus on private consumption, since it is the most important component of GDP activity, since it contributes two thirds of the total economy. Thus, if some indicators confirm that consumption is contracting, it is quite likely that GDP will be as well.

One of these unusual indicators is the Men’s Underwear Index , which measures, as you might guess, the sale of men’s underwear. This index suggests that, in economic crises, men tend to postpone the purchase of underwear or socks until the situation improves.

It is interesting to note that the effect is not noticeable in the case of women, which reveals that they continue to purchase these garments regardless of the stage of the economic cycle. There is currently no formal record of these indices, but empirical approximations can be made with indicators such as retail sales.

Another interesting indicator, although very controversial, is the Hemline Index (index of the hem), which is wrongly attributed to the economist George Taylor, for his work on the effects of war on the textile industry. The indicator shows that, during economic downturns, longer skirts are often worn, while in good times short skirts are more common. It should be clarified that, although there could be a certain correlation between the phenomena, this does not imply causality, the indices being mere empirical curiosities.

In 2000, cosmetics entrepreneur Leonard Lauder created another of the unusual indicators, the Lipstick Index, in which he proposes that during difficult times, women buy more lipsticks and other cosmetic products, instead of instead of spending your money on more expensive items like shoes.

In addition to having an empirical correlation, this index also confirmed a theoretical postulate, the substitution effect, which consists of changes in consumption patterns in response to variations in product prices (the consumer stops consuming the product that becomes more expensive , and replaces it with a more affordable one).

This index was effective in describing the Great Recession of 2008-2009, but lost effectiveness during the crisis caused by the COVID-19 pandemic, since the purchase of cosmetics lost its meaning if people had to confine themselves at home due to sanitary measures.

A final interesting indicator is that of savings banks, although this is more related to production and industrial activity than to consumption. Like the previous ones, it is easy to deduce the logic behind this index: if economic activity contracts, the demand for packaging and shipping will be less than it would be in a thriving economy.

It is worth insisting that these indicators are curious and interesting and form the fun part of the economy, but they are not formal, so, to know more seriously the state of the economy, it is always better to resort to official indicators (although whether they are boring after knowing the one with the chones).

Editor’s note: Ángel Huerta is an economic analyst at Grupo Financiero Bx+. He is an economist and apprentice mathematician. He likes tacos, classical music, and academic discussions on economic growth and social development. Tweet, then exist in . The opinions expressed in this column belong exclusively to the author.

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