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short essays and reports on the economic issues of the day
2002 ■ Number 5

Color Me Beige
Howard J. Wall
hen making monetary policy decisions, members
of the Federal Open Market Committee (FOMC)
want to know as much as possible about current
and future economic conditions. Unfortunately, most economic data are reported with a lag of one month or more.
Nevertheless, some nonfinancial economic data are available
every week, such as initial unemployment claims, auto and
steel production, and electricity consumption. Private forecasters use such data to update their estimates of currentquarter gross domestic product (GDP) through their
knowledge of how the industrial production number is
constructed from weekly data on electricity, autos, and
steel. The Fed supplements real-time analysis of the data
construction process in two distinct ways. First, it runs a
large macroeconometric model that uses past trends to
project likely economic outcomes from alternative policy
choices. Second, the regional Federal Reserve Banks conduct
surveys to gather qualitative information about economic
conditions in each district. Prior to every FOMC meeting,
this anecdotal survey information is compiled into what is
known as the Beige Book.
The information provided by the Beige Book adds value
in two ways. First, business cycle fluctuations are now
thought to be more heterogeneous across regions and sectors than they used to be. Hence, one hears references to a
“rolling recession” that bottoms out in different regions at
different times. State and regional data, however, are much
less complete than national data. In this void, the Beige
Book can help identify the current regional focal point of
such a rolling downturn. Second, for some one-time events,
macroeconometric models are not reliable guides because
history has not recorded a pattern for how the economy is
likely to respond. Examples of such events include the surge
in computer and software investment that preceded Y2K
and the terrorist attacks on September 11, 2001. The best
way to infer the likely consequences of such events is to
talk with business leaders to discern their plans. The Beige
Book provides a concise compendium of such a survey.


Because it is based purely on anecdotal information,
there are many reasons to question the usefulness of the
Beige Book in assessing economic conditions. For example,
it may partly reflect the biases of the economists who compile it, or policymakers may use only the anecdotes that are
consistent with the views they already have.
Recently, economists within the Federal Reserve System
have tried to assess the Beige Book as an indicator of present
and future economic activity. A study from the Minneapolis
Fed found that the Beige Book has been an accurate predictor of real growth in the current quarter.1 They also
found, however, that the Beige Book did not improve upon
private sector forecasts of real growth. Their conclusion is
that the Beige Book’s value is not as a forecaster of economic
activity, but in providing insight and context not found in
formal forecasting models. Other research from the Dallas
Fed offers stronger empirical support for the Beige Book
as a predictive tool.2 This study finds that the Beige Book
has significant predictive content for current and future
quarterly growth. Further, it argues that “the Beige Book
has information about current quarterly real GDP growth
that is not present in other indicators.”
Given the importance of timely economic information
for monetary policy, the Beige Book might be able to fill a
void in the data. Despite being purely anecdotal, it appears
to have been useful for assessing current economic conditions and possibly for predicting conditions in the near
future. ■

Fettig, David; Rolnick, Arthur and Runkle, David E. “The Federal Reserve’s
Beige Book: A Better Mirror than Crystal Ball.” Federal Reserve Bank of
Minneapolis, The Region, March 1999, pp. 10-13, 28-32.

Balke, Nathan and Petersen, D’Ann. “How Well Does the Beige Book Reflect
Economic Activity? Evaluating Qualitative Information Qualitatively.” Federal
Reserve Bank of Dallas Research Paper No. 9802 (forthcoming in Journal of
Money, Credit, and Banking).

Views expressed do not necessarily reflect official positions of the Federal Reserve System.