Economy perking up? Don’t bet on it.

Macroeconomic data is difficult to assemble, and is never contemporaneous. Deciding whether or not a recession is over is, therefore, a tricky call. Sometimes, however, microeconomic information that is available much faster can be used as a proxy for macroeconomics data.

The demand for any particular product is determined by price, consumer tastes, the price of other related goods, number of consumers, income and expectations about future prices and income. Over relatively short periods of time, tastes and prices are relatively constant as is the population. That leaves incomes and the expectations of future incomes as the main driving forces. The income elasticity of demand measures the responsiveness of consumers to changes in income. Luxury goods tend to be more responsive than necessities and since a large number of estimates exist on the income elasticity of products, we can use those to gauge the economy.

For example, sales of luxury goods are the first to fall during a recession and also quick to return in a recover. Watching the sales of toothpaste won’t help, since a consumer’s purchases of toothpaste are terribly insensitive to economic conditions.

An article in the Huffington Post (click here for article) provides a guide for budding economists. Watch sales of lingerie at Victoria’s Secret. “Miraculous” bras, priced between $49.50 and $250 have been selling out. Most would consider these bras as luxury items, perhaps indicating that the economy is on the rebound.

In a previous blog, What Happens in Vegas, Stays in Vegas, we cited a journal article that suggested the short run elasticity for gambling was 1.85. Gambling is very responsive to changes in income. An article from BBC News indicates that the initial public offering (IPO) for Harrah’s Entertainment, owners of Caesar’s Palace and other casinos has been cancelled due to continued losses as a result of economic uncertainty. (Click here for article)

Either gambling is more elastic than lingerie, or lingerie is being bought on credit. If the former is true, the economy is recovering. If the latter is true, the economy is on its way to recovery. Either way, things are looking up.