NEW YORK (MainStreet) — To take the temperature of the economy and predict its future direction, we use figures on unemployment, inflation and GDP. Of course, we all know that traditional economic forecasts are often wide of the mark. Could it be that economists look at the wrong factors? Should they be looking instead at, say, how busy Las Vegas escort services are or how volatile street prices for illegal drugs are?

Don’t laugh. A so-called “vice index” that looks at exactly those sorts of measures is part of one off-beat approach to economic prognosticating that at times has done as well or better than conventional analysis on forecasting key figures like new job creation. San Francisco-area economist Andrew Zatlin, who calls himself the Moneyball Economist, promotes this alternative approach. Different measures are needed, he says, because the world is different today than when we first used such metrics to gauge the status of our financial world. Rather than measures like how much steel is being manufactured, which were critical in the Industrial Age of the last century, today we should be looking at Information-Age figures on, say, semiconductor manufacturing, he argues.

“Most of the data points people rely on are 60 years old,” says Zatlin. “They don’t reflect the economy. Most of the people who use these got their PhDs before the Internet was invented. It’s like they’re in the horse and buggy world and we’re in the auto world.”

Something Zatlin and other economists agree on is that consumer spending drives the U.S. economy. They also line up with the idea that spending for luxury goods and services can be a leading indicator of where consumer spending and, therefore, the broader economy is heading. Where Zatlin differs is in what he considers luxury.

Zatlin scoffs at data on yacht sales and revenues at retailers like Tiffany’s. Those are too luxurious, he says, and only represent what a tiny slice of what ultra-high income consumers are spending on. Given the widely recognized bifurcation in the economy in the last decade or two, he says a more useful luxury index would look at, for instance, gambling revenues at blue-collar casinos, illegal recreational drug sales and, yes, prostitution.

“We want to get away from this top 1% definition of luxury,” he says. “A lot of people gamble. It’s a vice that cuts through every socioeconomic grip. Same with drugs, prostitution and drinking. All are enjoyed to a greater or lesser degree by every socioeconomic group.”

Basically, the appetite for vice across a wide swath of the population can indicate how healthy our discretionary spending is. 

The benefits of following vice have been recognized before. There is even a mutual fund called Barrier Fund that was formerly called the Vice Fund because of its investment strategy.

“It invests in drugs, alcohol, tobacco and firearms,” explains Scot S. Hanson, a Certified Financial Planner in Shoreview, Minn. “And it’s actually a wonderful mutual fund, performance-wise.”

The Barrier Fund shows a low correlation with mainstream indicators such as the S&P 500 Index. That, Hanson says, makes it useful for adding diversity to a portfolio. However, he stresses it’s not for your whole nest egg. A balanced portfolio should have other asset classes such as large-cap, medium-cap and global equities, as well as bonds, gold and other commodities. Hanson recommends the fund for no more than 5% of an overall allocation in a long-term account such as an IRA or Roth IRA.

Scott A. Stratton, a Certified Financial Planner and president of Good Life Wealth Management in Dallas, notes that reliable data on illicit activities such as illegal drugs and escort services may be hard to come by. And he cautions against basing investment decisions on any data point or set of data. The conventional measures have their uses, he says, although the 21st-Century torrent of digital information makes it likely new and perhaps better measures will emerge.

“I’m sure we will see more data becoming available and we will see growing sophistication in computer modeling that will be able to better tie together a mosaic of data, rather than finding one or two ‘magic’ indicators that work best,” Stratton says. “I don't think we will ever reach a point where economic indicators will make investing predictable, because we can never anticipate wars, industrial accidents, weather, legislation or disruptive technologies. The science will improve, but there will still be an art to investing.”

Zatlin also feels that it’s important to get a feel for a culture and an economy. One way to do this is with Google Trends, which identifies the most popular Internet search terms at any moment, as well as several years back. Though his exact methodology is proprietary, his track record has been good, especially during a remarkable run of accurately predicting jobs figures.

So what do the vice figures say about the near future? Zatlin thinks escorts, croupiers and drug dealers, along with more savory economic players, will party through the year’s first half at least. After mid-year, softness could set in, but probably not before.

“I’d say anything in the leisure industry is about to look really tasty,” he says. “People are playing.”

—Written by Mark Henricks for MainStreet