What Can Fashion Tell Us About the Economy?

Written by Rita Silvan

Long before algorithm-fuelled robots could anticipate our thoughts and actions, economists and investors sometimes turned to more primitive market-prediction tools, such as men's underwear and women's skirts.

The premise was that an uptick in sales trends of consumer goods like short dresses, lipstick, high heels, skinny ties and Swiss watches could predict a similar uptick in economic and stock market performance.

The Long and Short of It

One of the oldest and most frequently cited fashion-linked theories is the "hemline index." Developed by American economist George Taylor in 1926, the theory suggests that as hemlines rise, so do stock markets. The rationale behind the idea was that shorter skirt lengths allowed women to show off their expensive new stockings. In Taylor's era, silk stockings were considered a precious commodity: a fragile status symbol, easily ruined by snags and runs.

How has the theory played out in the past? Prior to the stock market crash of 1929, hemlines rose, as they did again during the 1960s with mini- and micro-mini skirts. Hemlines took a dive immediately after the 1929 crash, and again after the 2008 global economic crisis.

Testing the Hemline Indicator

In 2010, a team of researchers in the Netherlands decided to put the hemline indicator idea to the test to see if it really had any predictive power. The short answer? Yes — with a but. Analyzing economic and fashion data from 1921 through 2009, the researchers concluded that economic conditions influence fashion styles, but with a lag time of about three years. In other words, the hemlines were reflective of what was happening in the economy three years prior.

This makes sense when you consider that fashion designers create their collections and place their fabric orders several years in advance.

It might be harder today to make a direct correlation between fashion trends and the economy. That's in part because designers, in an effort to woo fickle customers, could be considered more democratic, offering something for everyone. Gone are the days when someone like French designer Christian Dior — who became known as the "tyrant of hemlines"— could decree that all women must wear a specific seasonal hemline length or risk being hopelessly out of fashion.

The hemline indicator is just a theory, of course, but who doesn't like to ponder where the markets may be headed?