How Well Does the Beige Book Reflect Economic Trends?

The Federal Reserve’s Beige Book is released before each of the eight regularly scheduled Federal Open Market Committee meetings per year. The idea is that the report—which emphasizes anecdotal and qualitative information—will provide a timely assessment of economic conditions before the official statistics are released, as noted in a June 2022 Economic Synopses essay.

So, how well does the Beige Book capture economic trends? Senior Economist Charles Gascon and Research Associate Devin Werner answered this question in their essay, focusing on trends in U.S. labor markets and inflation. They found that simple text analysis can pull out useful metrics from Beige Book text.

Coming Up with a Count

The authors’ text analysis was based on the number of times certain words or phrases appear in a Beige Book report. “If the Beige Book accurately captures economic trends, its focus on certain topics should correlate with related macroeconomic data,” they explained.

For each of the two topics they examined in Beige Book reports since 2000, the authors did the following:

• They compiled a list of identifying words and word roots; these included “labor-” and “worker-” to examine labor market trends and “price-” and “inflation” to examine inflation trends. They also made a list of counting words and word roots; these included “tight-” and “short-” for labor market trends and “increas-” and “pressure” for inflation trends.
• They counted each time any word from their counting list appeared in a sentence that also had any word from their identifying list.
• Finally, they took the sum from the previous bullet as a percentage of the total word count in a particular report.

Analyzing Labor Market and Inflation Trends

The authors first looked at how references to labor market tightness in the Beige Book compare with the Kansas City Fed’s Labor Market Conditions Index. They found that the two series have a high correlation (0.74), with both increasing during economic expansions and decreasing before and during recessions.

Then they looked at references to price increases in the Beige Book, which includes changes for both consumer prices and producer prices. They compared that series with actual inflation as measured using the personal consumption expenditures price index. Again, they found that the two series track each other closely. In this case, the correlation was 0.73.

The text analysis “shows that the Beige Book contains useful information for understanding economic trends—even when that information is extracted by a simple automated process,” the authors concluded. “Such a reading of the Beige Book can provide a quick signal and easily track changes over time.”