By Sarah Foster
Medill Reports

The words remind him of shuffling through yellow pages inside a library, calling auto dealers at random for informational interviews. The phrase evokes scenes of yelling over large stacks of research documents atop his desk — the only way he could communicate with nearby colleagues.

These practices were more than just habits. They were sacred rituals, essential for success during the first five years of his 13-year career as an economist at the Federal Reserve Bank of Chicago. It didn’t take much for him to remember these days, but it all come back to him with the utterance of three words: the Beige Book.

An anecdotal report

The phrase powerful enough to bring back these memories for Bergman, now director of research at the government advocacy nonprofit Truth in Accounting, is the colloquial name of a report published by the Federal Reserve System. “The Summary of Commentary on Current Economic Conditions,” as it’s officially known, covers economic trends by industry across each of the Fed’s 12 regional banks. The Fed has compiled reports like these since 1970, making them public beginning in 1983. The report is published eight times a year, its cover glossed in the color of its namesake.

On its face, the Beige Book is anything but complex. It’s always exactly 32 pages. It lacks economic algorithms, data models or complicated terms. Instead of numbers, the report relies on qualitative evidence gathered through informational interviews and surveys with Fed districts sources, such as company executives, economists and market experts. It’s as important as it is simple.

“It gives a sense of the risks people are concerned about,” said Bill English, finance professor at Yale University who worked for the Fed’s board of governors, the central bank’s governing body, for more than 20 years. “What is worrying firms and households, and what should worry the committee? These don’t come out of the national statistics, but they can come out of the anecdotal reports.”

Information is grouped by industry, but interviews remain anonymous to help sources feel comfortable talking openly about business practices, said Doug Tillett, vice president of public affairs at the Chicago Fed. The final report is comparable to minutes from a meeting rather than a transcript, he said.

Manufacturers expressed concerns about the mounting trade war with China in the most recent Beige Book published July 18, reporting higher prices as a result of new Trump administration trade policies that imposed billions of dollars’ worth of tariffs on imported goods. Ten of the districts reported moderate economic growth, including Chicago, primarily within manufacturing production.

The Beige Book has long been a topic of discussion among business news media outlets and Fed followers, attracted to its brevity and understandability. But among the inner circle of economists, the Beige Book has become a source of both praise and criticism. Some see the report as a valuable research tool that can supplement data. Others have questioned its validity and reliability from the start.

Digging under data

An economist by trade, Bergman was taught to value numbers more than stories. Still, his days preparing the Chicago Fed’s section of the Beige Book are hard for him to forget, an attachment traceable to a moment in the early 1990s, during his first few days on the job. While revising year-old employment data for jobs excluding freelance and farm work, Bergman had a startling realization: The revisions were dramatic.

“Counting heads is hard, let alone measuring economic growth,” Bergman said. “Seeing how dramatic the revision was, questioning what do you know and when do you know it based on government statistics, I started to wonder, ‘What is the truth?’”

When Bergman joined a team of economists responsible for assembling the Beige Book, he soon found a way to address this concern, his research becoming a full-time endeavor. He traveled to western Michigan to speak with local businesses and company officials. He scoured small-town newspapers, hoping to find stories revealing local economic conditions. He started discovering trends that had not yet appeared in the data, he said, illustrating the value of fieldwork.

The Fed continues to publish the Beige Book believing anecdotal information is more forward-looking than data, the Chicago Fed’s Tillett said. Economists study data to predict the future, but predictions are difficult when numbers are backward-looking by nature, he said.

Data also has a lag, Yale’s English said. During the January meeting, for example, the board of governors won’t know first-quarter conditions until April.

Because summaries are separated by regional Fed bank and industry, the Beige Book does a better job than data at highlighting geographical variations in the economy, said Mark Witte, economics professor at Northwestern University who specializes in public finance and spent two years as a consultant to the Fed. While inflation may be too high overall, certain regions of the country could still use some extra help. The Beige Book is often the first indication of regional divergence, he said.

“Think about Greece,” Witte said. “Greece has been a disaster for 10 years, but Germany is growing quite well. The right policy for Germany might not be the right policy for Greece. That’s going to often be true for the U.S. as well. There’s no one-size-fits-all.”

Each regional bank has a different approach to assembling the Beige Book through research and interviews. Some regional banks make in-person visits to business organizations and companies throughout their districts, said Martin Lavelle, business economist at the Chicago Fed’s Detroit branch who works on the Beige Book. Many regional banks also distribute online surveys that differentiate based on the participant’s industry. Others host roundtable discussions with executives and economists.

Some contacts are identified by coincidence. A Fed official may interview a business executive or economist after meeting them at an event, Tillett said. The number of interviews also differs depending on the geographical size and population density of the region, but no specific number of sources is required, he said.

Economists have a different method for determining when they feel their information is comprehensive enough to stop reporting. Ron Wirtz, regional outreach director at the Minneapolis Fed who is part of a two-person team that assembles the ninth district’s Beige Book, primarily sends out questionnaire surveys to his contacts. If he’s lucky enough to get an expert source, he’ll stop reporting.

“It’s quality over quantity,” he said. “I’m willing to take fewer responses because of the quality of the contact.”

A study with impact

The Beige Book has the potential to directly affect the economy, but understanding its impact requires a knowledge of the entity overseeing the report, Northwestern’s Witte said.
The Fed has a dual mandate: ensuring maximum employment and low inflation. When the economy is sluggish, it typically needs a boost. The Fed spurs this by deciding to lower interest rates during Federal Open Market Committee meetings, which makes money cheaper to borrow. When the economy grows too quickly, the Fed slows it down by raising rates, which makes money more expensive.

But the economy doesn’t come with a diagnostic report, Witte said. The FOMC consults with a wide variety of sources to determine its performance, sources that are both qualitative and quantitative. The Beige Book is just one piece of the puzzle, he said.

“There’s a speed limit to the economy, but we don’t know what that is,” Witte said. “The Federal Reserve is trying to figure out how fast we can grow in the long run.”

Two weeks before each FOMC meeting, a new Beige Book is published. At the meeting, all regional Fed presidents attend, including the seven nonvoting presidents, and participate in discussions. Many open their remarks by summarizing interviews collected through Beige Book research, said Yale’s English.

“They say, ‘I’ve been talking to people in my district, and this is what I’m hearing,” he said. “It may be a useful early indicator of what’s going on.”

Alan Blinder, who attended each FOMC meeting during his 18-month tenure as vice chairman of the Fed board of governors, remembers these remarks specifically because he often questioned their authenticity. He wondered if presidents swayed the presentation of their information to affect monetary policy to the advantage of their district. Anecdotal information can’t be safeguarded against biases as much as data, Blinder said. Presidents who were dovish tended to come from districts with weaker economies, while presidents from districts with stronger economies tended to be more hawkish, he said.

“You need to be on guard for the danger that someone is putting too much weight on that one piece,” Blinder said. “You add up these anecdotes and get a picture of it, and you wonder, ‘Am I getting a biased picture depending on which bank is putting it together?’”

For these reasons, it’s questionable how much the Fed truly relies on the Beige Book for monetary policy decisions, said Charles Calomiris, finance and economics professor at Columbia University who previously served on a Fed advisory committee. The Fed is made up of economists and expert researchers who know better than to rely on anecdotal evidence at the risk of bias or inaccuracy, he said.

In Blinder’s experience, the Fed didn’t rely on the Beige Book much at all for monetary policy, he said. Rather, it utilized the report to gauge conditions in the districts.

“If the head of the Cleveland Fed reports that department store sales are booming, but most of the 11 other districts don’t, the FOMC won’t conclude that department sales are booming,” Blinder said. “The Fed makes one monetary policy, not 12 of them. The utility of the Beige Book for policy-making is rather in the sum of the information.”

If it’s not meant for monetary policy, it’s possible the report is intended to maintain strong relations with local business and community contacts, Calomiris said. If Congress tried to reduce the strength of the Fed, the central bank would call upon district Beige Book contacts for help, he said.

Business contacts were important to the Fed during the 2008 financial crisis when Congress considered limiting the central bank’s powers or completely pushing it out of the regulation business altogether, Blinder said. The Fed marshalled the support of contacts to tell Congress why they thought it was a bad idea. The process proved successful, he said.

“Local congressmen know how the Fed feels about having its role shrunk. It doesn’t like it, and that’s not new,” Blinder said. “But if they hear from 10 bankers or 16 industrialists in the districts that this is a terrible idea, that we shouldn’t do it, it counts.”

The Beige Book does provide some useful information, Calomiris said, meaning it shouldn’t entirely go away. But the same kind of information can be obtained in other ways, such as machine-learning algorithms or Internet searches, he said.

To Calomiris, the Beige Book and the Fed should be analyzed with both an economic and political science lens. Though the central bank claims it’s nonpartisan, it will always strive to maintain its power, as most with power often do, Calomiris said.

“There is no such thing as power allocated neutrally. When you allocate power in a political process, you affect the way the agent is going to respond,” he said. “What the Fed says and what the Fed does can be used as tools, part of its own survival.”

This is the first in a multi-part series on the Federal Reserve System Beige Book. Read the next article in the series: “Fed’s Beige Book draws skepticism from economists, academics”