The Federal Reserve Bank, known for issuing market-moving interest rate decisions and obtuse economic reports with mountains of data, released its anecdote-laden and aptly named the “Beige Book” this week with nary a number in sight.
“Economic conditions continued to expand” nationwide, although severe snowstorms in early February hurt several regional economies, the Fed reported. While nine of the 12 Fed districts showed growth, “in most cases the increases were modest.”
The six-state Minneapolis District economy “grew modestly” with slight upticks in consumer spending, services, energy, mining and residential construction and real estate. Tourism was described as “mixed” with some ski resorts showing soft bookings. Manufacturing and commercial construction were “stable” and commercial real estate and agriculture “were down.”
Issued eight times a year, two weeks before the Federal Open Market Committee (FOMC) meets in Washington to set monetary policy, the Beige Book is a condensed description of the economic mood of the country, based on thousands of interviews, queries and observations, but no statistics. While the FOMC relies on forecasts generated from national statistical models to make its monetary policy decisions, the Beige Book input is also part of the deliberation.
“It’s nice to get hard data but also the gut feel of business people and others around the community… to help FOMC make their decision,” said Toby Madden, regional economist for the Federal Reserve Bank of Minneapolis. Data-saturated statistical models are not good at identifying a turning point in the economy, nor do they capture the “human element,” he observed.
The reports also give bank regulators and supervisor “a feel for how the economy is doing overall” as they make decisions about regulation of financial institution within their jurisdiction, Madden said.
Described by the Fed as more of a mirror than a crystal ball, nevertheless investors often view the Beige Book as a guide to Fed thinking and a predictor of interest rate moves. The market seemed little affected by the report with the Dow dropping 9.22 points and the S&P 500 ticking up 0.49 points the day of release. (For an interesting look at the history of the Beige Book and its predictive value, go here.)
Each of the 12 districts compiles thousands of pieces of anecdotal input, from contacts and interviews to newspaper reports and blast emails, then condenses the information into a three-page report which is further condensed and compiled into one national report. Before the internet, the information-gathering process was primarily laborious phone interviews and personal observations of Fed staffers.
A Business Week article following the market crash of 1987, which catapulted the Beige book into prominence, described the process at the time. “Thousands of … tidbits have poured into the Federal Reserve System’s Washington headquarters since Bloody Monday. … The regional Feds survey businesses in their districts, tapping more than 300 members of various Fed boards, as well as hundreds of informal contacts, to compile the ‘Beige Book’ on regional business conditions. … Even ‘eyeball evidence’—like Minneapolis Fed President Gary H. Stern’s car counts at the local malls — go into the information stream.”
Today, the cost of gathering data has dropped substantially and with email lists and on-line ad hoc surveys, a much broader cross section of organizations and companies, including small businesses, provide input, Madden said, expanding the input substantially.