Predicting a recession isn’t foolproof. But the economic indicators that are typically used to do so: GDP, jobs reports, unemployment insurance claims, manufacturer’s new orders, and building permits are all time-tested metrics for predicting in what direction the economy might go.
Yet other, lesser-known indicators can also paint a compelling economic picture.
Though somewhat unscientific, indicators such as the lipstick effect (the sales of little luxuries), or measuring how often politicians use the word “recession” in the House of Commons, can also shed a lot of light on the current economic climate, says Jonathan Graves, assistant professor of teaching, Vancouver School of Economics at the University of British Columbia.
Hey, Google!
Over the summer of 2023, for instance, Google searches of the words “recession” and “Canada” peaked, suggesting Canadians were very worried about their financial prospects, Graves says.
Although the number of searches has declined since then, the surge in searches highlights the sometimes uncanny accuracy of these types of indicators. Recent numbers show that in the second quarter of 2023, GDP was 0%, household spending decreased, housing investment fell and household savings rose. Those Google metrics were oddly indicative of what was happening economically.
“Recessions, like many other economic events, although they’re influenced by things like productivity, growth or employment, they’re also profoundly influenced by people’s expectations and beliefs – what they think, what they feel about the economy, where they think it’s going,” says Graves.
As a result, how people react to the possibility of a recession — whether they curb their spending, forgo big purchases, and generally have a negative outlook — can actually help drive an economic slowdown.
“It’s a self-fulfilling prophecy in some ways,” he says.
Macroeconomic indicators for the win?
But while atypical indicators can be fun to track, it’s really the macroeconomic ones that stand the test of time, says Aaron Goertzen, senior economist and director, BMO Capital Markets.
These include GDP, manufacturing, unemployment figures, housing starts, retail sales and building permits, among others.
These metrics, however, can have their limitations.
“Understanding where we are right now (economically) is actually a big issue,” Goertzen says.
“A lot of the important macroeconomic indicators such as GDP, they’re published with a pretty big lag,” he says. GDP is quarterly data and, in Canada, comes out two months after the end of a quarter.
“So you only get to know what happened in April to June at the beginning of September,” he says. Plus, he adds, the data is often revised after the fact.
Even the more frequently released indicators, such as jobs reports that come out monthly, are too focused to offer a bigger picture.
“They offer a narrower slice of what’s happening in the economy,” says Goertzen.
Getting a fuller picture
As a result, economists need to examine a variety of indicators to make determinations about the state of the economy.
And while decidedly less robust — and a bit controversial — the following indicators can also provide an economic snapshot:
● Lipstick effect: This indicator refers to the behaviour of consumers during an economic downturn who buy “little luxuries” like lipstick when they don’t have enough money to purchase big-ticket items. According to Statista, sales of cosmetics and fragrances surged in the third and fourth quarters of 2022 in Canada, with sales totalling $1.9 billion in the fourth quarter alone.
● Consumer sentiment: Sentiment is really important, says Graves, as it affects economic behaviour. “Imagine I run a small business but I’m hearing the economy is going to be entering a recession,” says Graves. “As a small business owner, I might decide to not take out a loan and I’m not going to expand my business.” He says that if many people have the same beliefs, this may slow down investment nationwide, which in turn affects GDP growth, eventually leading to the recession the business owner expected.
● Business outlook survey: The business outlook survey tracks the sentiments of Canadian business owners quarterly, the findings of which are collected in a numerical survey to show how people are feeling about the state of the economy, says Graves. Looking at Canadian business owners’ perspectives regarding a number of key decisions – such as whether to expand – can be very telling.
● Monetary Policy Report: The Bank of Canada’s Monetary Policy Report tracks spending on goods and services. “It’s a great resource,” says Graves. “You can see that in Q1 2023, spending across all categories jumped relative to 2022.”
● Search engines: Using Google Trends to look up the search frequency of words like “recession,” “inflation,” or “depression” can shed some light on how people are feeling – often before macroeconomic indicators reflect the same thing, says Graves.
● Politicians talking about economic downturns: Graves says that politicians discussing economic slowdowns can also be very illustrative of how the economy is doing. By reviewing Hansard transcripts, which provide a transcription of what was said in the House of Commons each day, analysts can see how many times the word “recession.” That’s “a pretty good indicator of whether we’re entering or in a recession,” he says.
Regardless of whether lesser-known indicators are showing a recession, Goertzen says that, at the time of writing in the fall of 2023, macroeconomic indicators do in fact indicate an economic slowdown is likely in the cards for Canada.
Given growth has been zero, and “most of the leading economic indicators are flashing, we do think a mild recession in Canada is ahead,” he says.
It may be a good time to buy some lipstick.
