What the Ups and Downs of This Economic Indicator Reveal


Today’s Weekend Daily Reckoning broaches a topic I’m so ill-qualified to comment on I can barely contain my nervousness. For possibly the first time ever in this publication, today we are going to talk about…women’s fashion. Here’s why: if you’re worried Australia’s economy is nothing but a housing bubble at the tail end of a credit boom, the latest David Jones Fashion Show suggests otherwise.

What gives? The Australian Financial Review spells it out for us…

If the hemlines at David Jones’ autumn/winter fashion parade are any guide, the Australian economy is going backwards. According to a little-known¬economic index known as the hemline indicator, dress lengths rise when times are good and fall when times are bad.

Hence, mini-skirts came in during the 1960s, and dresses were ankle grazing during the Great Depression and the 1990s recession.

The theory, invented in 1926 by economist George Taylor, stems from the days when women wore expensive silk stockings. It’s debatable whether it still applies today, when a pair of pantyhose costs as little as $2 and most fashionable women prefer to show off their bare legs.

Nevertheless, while the catwalk at David Jones on Wednesday night was popping with bright colours, hemlines were noticeably longer than last year’s thigh-skimming styles, matching the more conservative economic mood.’

I haven’t done any formal study of this phenomenon. Perhaps I should pay more attention in this area. However, it is something my colleague Terence Duffy has kept an eye over the years (no pun here, really). So check out this article from when the good times were rolling in the heady days of 2007…

How to Forecast the Next Credit Bust

If you can’t make out what is in the circle, it says, ‘Most surprising among them, at least for any fashion reporter silly enough to think hemlines could not rise any higher than they did last summer, was the fact that they did.

‘A lot higher. Sydney brother and sister team Camilla & Marc opened the week with a show of stiff shift frocks, some breathtakingly short, with barely a handspan of silk or cotton between modesty and flash.’

Barely a handspan? Good Lord. Terence tells me that in 1927 short skirts were all the rage. Young women strove to show off their knees with increasing abandon. Many girls even rolled down their stockings and painted rouge on their knees in an effort to emulate a ‘naughty schoolgirl’ look.

Times change, and not always for the better. The crash of 1929 and subsequent depression saw to that. The 1930 autumn Sears catalogue admonished, ‘Thrift is the spirit of the day. Reckless spending is a thing of the past.’

The beginning of the decade saw women sewing more. Clothing was mended and patched before being replaced. Hemlines dropped dramatically to the ankle and remained there until the end of the 30s.

All this does put a much more interesting angle on the latest Federal Reserve interest rate decision, don’t you think? Who would have thought you could have been reading The Age in 2007 and could have known at the time that hemlines — and therefore business conditions — had nowhere to go but down?

Perhaps if the Reserve Bank of Australia paid more attention to things like this, they might have seen the crash coming. Alas, the central bank doesn’t measure hemlines, or apparently anything else of predictive use.

Let’s go back to the AFR article about David Jones. It reports that the hemlines at the show were mixed — some long, some short. That seems quite prescient about the Australian economy. The mining states are off the boil but New South Wales and Victoria are chugging along OK.

At the bottom of the article is this comment:

Economists believe the 0.25 per cent rate cut this week and the sharp drop in petrol prices will deliver a modest boost to retail spending, as consumers are more likely to use the extra cash in their pockets to pay down debt.’

This is exactly the opposite of what you should be doing when asset prices break into new highs early in the real estate cycle. Here’s why. It proves that prices will continue to go up, because everyone is paying off debts, which means the cycle cannot collapse at this point.

The Australian market has just broken into new six year highs. US markets are in all time new highs and set to go higher later in 2015. Our research, from 200 years of data, clearly indicates years ending in five have all been very strong bull years.

Nobody seems to be paying much attention to the fact that over in London the FTSE index is also close to breaking in to all time new highs. Higher skirts? Bring on the boom times. Your intrepid DR reporter will bring you further measurements as they come to hand.

All you worriers need to relax. As above, when the hemlines are low, you don’t need to stress. It’s when they go up you can get into all sorts of trouble.


Callum Newman
for The Daily Reckoning Australia

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Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.

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