What your social life says about the economy
by David K. Randall and Jon Bruner, Forbes.com
Tuesday, December 30, 2008 provided by forbes
How does an economic slowdown affect day-to-day tasks like deciding what to wear, what to listen to and what to eat? Those questions are the driving force behind what's known as social economic indicators.
The most famous social indicator is the hemline index, developed in the 1920s by George Taylor, an economist at the Wharton School, which showed that the length of dresses increased when the economy slowed.
Recent studies have purported to show that the tempo of popular songs slows, that beer and pasta sales increase, and that Playboy's Playmate of the Year tends to be older and heavier during bad economies.
But these indicators are of little value if you're wondering where the economy is going. Instead, they're a much better sign of where the economy has been.
“The problem with these metrics is that people will continue to feel bad into an expansion,” says David Kelly, the chief market strategist for J.P. Morgan Funds.
Kurt Karl, the chief economist for Swiss Re, agreed, saying, “There are many spurious connections that can last for a little while, but there's no social indicator with any common sense underpinning to it.”
The lag between economic expansion and the time those gains are felt through the wide economy can last between a few months to over a year, experts say. Consumers spooked by a layoff may be more careful about their spending in the future even if they find employment again, for instance.
That will push the Consumer Confidence Index down. Or, there may be other reasons why growth is overshadowed. The S&P 500 grew almost 30 per cent during the Carter Administration, but inflation and the Iran hostage crisis contributed to widespread unhappiness.
Consumers can also feel good about an economy that's slowing or a bubble that's bursting. A&E launched its show Flip This House in the midst of the housing bubble, which contributed to a widespread idea that it was easy to improve and resell a house for a quick buck well into the declining housing market. Some of the biggest failures from the dot-com bust were the result of overeager investors bidding up shares for no reason other than exuberance.
All of this means that the latest consumer confidence numbers don't necessarily portend an extension of the downturn. The University of Michigan's index of consumer confidence dropped to its lowest level since 1980 in November, but that most likely reflects bad news from the last month or two rather than prospects for the near future.
Other types of social indicators like divorce rates, fertility rates and drug crimes are of little value in determining growth as well, according to a 1998 study by Johannes Fedderke and Robert Klitgaard in Economic Development and Cultural Change, a journal published by the University of Chicago. The study, which looked at over 25 countries, found that the chief social indicators that go along with economic growth are strong individual rights, political stability and efficient government institutions.
What cultural clues should we look for to know that we're once again in a period of growth? Advertising is one. If marketers think that they can sell more products by emphasizing fun or luxury rather than value, they expect that those moods have a greater cultural relevance and will thus lead to more sales.
Popular car sales is another. While vehicle sales is a standard metric for economists to gauge the health of the economy, the specific type of vehicles sold often reflects the national mood. Sales of small, fuel-efficient cars typically make up a greater proportion of overall sales during downturns, while larger vehicles or luxury models do better during times of growth.
But given its track record, maybe we should look to A&E. Once it starts broadcasting Makin' Do With What You Have, we'll know we're in a period of growth.
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