What is the lipstick effect?

Do you know that lipstick sales are considered a way to know if we’re in a recession?

It’s called the lipstick effect, or the lipstick index, and it’s regarded by some as a helpful way to understand how consumers are responding to an economic downturn.

What is the lipstick effect?

The lipstick effect is an economic theory that suggests when consumers are cash-strapped or in a recession, they are more likely to buy small luxury items, like brand lipsticks, makeup products, or spend money on small and affordable luxury goods or activities.

The theory is that consumers do this as a way to still treat themselves - or even try to forget - that they’re in a recession.

It’s worth noting that there have been instances where, depending on the country, nail polish has been measured, instead of lipstick.

How long has the lipstick effect been around?

The lipstick effect is a theory that’s been observed since the 1930s. Studies into the spending patterns of consumers during the Great Depression showed that while the spend on clothing declined, the spend on cosmetics increased - even though it was a more expensive category.

There is a theory that it was because with such a tight job market, consumers were buying items that might help them secure a job.

However many believe this effect is largely more psychological - that as many women may have felt they were struggling with uncertainty (in the economy and the impact on their personal life), purchasing lipstick was a treat that helped them define themselves amidst the uncertainty.

Ever since then, the increase in spending on makeup and lipstick has been observed during different periods of uncertainty. For example, cosmetic companies such as Estee Lauder noticed an increase in sales during the recession of 2008.

What does Australia’s lipstick sales say about the economy now?

Recent retail trade figures show that Australians are spending much less than they were less than a couple years ago - and after 13 cash rate hikes and an increase in the cost of living, that’s no surprise.

However, according to industry leaders, there’s still one item being purchased - lipsticks

Paul Zahra, ex CEO of David Jones, and now head of the Australian Retailers Association told the ABC:

"Now, when we're seeing a downturn in sales — because I've been in this game for a little longer than I'd like to admit — we see that women particularly will go and actually spend money on a new lipstick to update their look, versus buying a new dress," said Paul Zahra, who now runs the Australian Retailers Association.

"And that's what we're seeing, you're seeing those high levels of compromise in their shopping."

If lipstick sales are up, does that mean we’re in a recession?

By all official measurements, the country is not in a recession.

This was made clear in the most recent national accounts released by the Australian Bureau of Statistics, where the country’s GDP (gross domestic product) grew for the second consecutive quarter.

The Reserve Bank of Australia has defined a recession as “a sustained period of weak or negative growth in real GDP (output) that is accompanied by a significant rise in the unemployment rate.”

However, there is also what is called a ‘technical recession’ - which is what most journalists will refer to when they say there is a recession. A ‘technical recession’ is when there have been two consecutive quarters of negative growth in real GDP.

Did you know that based on the definition of a ‘technical recession’, Australia has not recorded a recession for 29 years - something countries similar to Australia can’t say!

Should we use lipstick sales to define how the economy is going?

Lipstick sales, whether you believe they’re a good way to define how an economy is tracking or not, are just one way that economists and journalists will try to understand how people are coping.

While the effect may not point to any hard and fast statistics on the economy, what it does is show that many consumers, when facing moments of adversity, are finding ways to cope and demonstrating resilience.

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