The Federal Reserve's Beige Book is a 20-plus page report published by the central bank eight times each year, giving a run down of general economic activity, which is obtained through on-the-ground and anecdotal evidence.
The idea is for the Federal Reserve to gather and communicate evidence indicating how the economy is growing. Of course, the Fed has many ways of doing this. Federal Reserve Open Market Committee (FOMC) members speak several times a year, giving updates on employment, wages, inflation and ultimately the trajectory of interest rates, but the government agency finds use in speaking directly with business executives, economists and financial market experts, who tell the Fed that businesses are expanding or not, increasing or decreasing prices, and paying their employees more or less. Those sources also tell the Fed what businesses intend to do going forward.
The published document is completely qualitative. Each of the 12 member banks that comprise the Federal Reserve conduct interviews and surveys with their sources. The report usually starts with a national summary, roughly one page, that consolidates all observations into a write up of overall economic activity, employment and wages, and inflation. Then, pages are dedicated to each member bank, each of which gives its own observations of both macroeconomic trends plus trends in each of the following sectors:
Manufacturing, construction and real estate, transportation, banking and finance, energy, non financial services, information technology, retail and consumer spending, agriculture and natural resources.
What's the Point of the Beige Book?
Ultimately the Federal Reserve needs to decide to raise interest rates, lower them, or hold them where they are. In order to accomplish that responsibly, it needs to quantify where prices are headed. But in order to have a complete picture of what the economy is doing, the Fed needs qualitative evidence that allows it to characterize the very recent trends and the developing trends on a forward-looking basis. Macroeconomic data is useful, but only to a certain extent. The Fed needs to understand how companies are thinking about their environment, how economists are shaping their views, and how investors are shaping their economic assumptions, which underpin their investment decisions. The Fed is then able to anticipate with sharper precision where the economy may be headed.
Here's a line from the Federal Reserve's Oct. 24, 2018 Beige Book:
"The qualitative nature of the Beige Book creates an opportunity to characterize dynamics and identify emerging trends in the economy that may not be readily apparent in the available economic data."
Secondarily, the Beige book allows the Fed to understand economic trends in different parts of the U.S. The U.S. is a huge country. Some people even say it has several different economies in it. The evidence "enables comparison of economic conditions in different parts of the country, which can be helpful for assessing the outlook for the national economy," the October 2018 report said.
What Did the October Beige Book Say?
The key phrase in the October report was "modest to moderate." That phrase was used in reference to the rate of overall economic growth -- indicative of broader GDP -- and consumer spending, which provides an indication as to what level of inflation the consumer price index will show. The report also noted that wage growth was linked to a labor shortage, which isn't surprising, as unemployment is currently below 4%.
Some might ask why the stock market tanked between Oct. 9, 2018 and the end of the year. The Dow Jones Industrial Average fell almost 12% in that span. Sure, economic growth is still positive, but financial markets look at future company performance and therefore equity values. The full year of 2019 is expected to yield a GDP growth rate lower than that of 2018. Corporations are also expected to report a slower rate of earnings growth. The chances of a recession within the next few years are increasing. Investors digested that information and sold off much of their positions in the stock market.
Wednesday, Jan. 16: Newest Beige Book Is Out
This is the day the first Beige Book of the year comes out. Recently, there have been both encouraging and discouraging employment reports -- one that easily beat economist's estimates and one that badly missed estimates. This is is just data. The Fed will certainly need on-the-ground information from companies as to why some companies are hiring more and why some are hiring less.
Why This All Matters
If the economy appears to be strong, stock investors will be encouraged. If companies are expanding and demand for goods and services looks strong, the stock market may move up. However, if it appears that there could be rising inflation, stocks may fall, as the market might assume that the Federal Reserve will raise interest rates in 2019. Currently, the treasury market is pricing in no added raises, with the the 10-year treasury yield at 2.71%. If rates move closer to 3%, that would indicate inflation is getting to 2% or above.