Gary H. Stern - President, 1985-2009
Published March 1, 1999 | March 1999 issue
If someone from the Federal Reserve happens to ask you, "How's business?" it might be more than just casual conversation. We really want to know. In addition to the reams of data, sophisticated models and forecasts, and rigorous analysis available to the Federal Open Market Committee in its deliberations about monetary policy, the FOMC is also presented with an anecdotal report of the U.S. economy, known as the Beige Book (unsurprisingly, for the color of its cover). The Beige Book is a compilation of regional economic reports and a national summary drawn from a network of business owners, farmers, labor leaders and others.
But what is the value of such information? Generally speaking, that is the question that researchers at the Minneapolis Fed recently answered when they read and scored every Beige Book national summary dating to the book's inception in 1970. (From 1970 to 1983, prior to becoming a public document, the Beige Book was known as the Red Book, again, for its cover stock.) The researchers' findingsalong with a history and further explication of the Beige Book processare discussed within. Essentially, what they discovered is that "the Beige Book does not improve upon private sector forecasts." As the article shows, this has implications for how the Beige Book is usedespecially by media and Fed watchersbut does it negate all value of such anecdotal information? Certainly not.
For example, one of the most important questions that the FOMC considers is the rate of inflation. Is it increasing, decreasing oras some contend todayhave we reached a point of price stability? As Fed Chairman Alan Greenspan has described it, price stability is attained when inflation does not affect decisions made by households and businesses. Others have offered similar definitions, and they make sense, but how would we know when we have achieved such status? We have data to tell us what the rate of inflation was, and we even have fairly reliable statistics that tell us the current rate, but looking forward and determining to what degree inflation is a factor in the decision making of consumers and businesses is a trickier affair.
So, given the above definition, how do we recognize price stability? And how do we gain insight into many other questions facing the economy? Indeed, one of the values of anecdotal information is that it can help to confirm trends that may be just starting to emerge in published statistics. It can also help provide a handle on productivity, a concept traditionally difficult to measure accurately. In short, it certainly doesn't hurt to ask business leaders and others about the economy. And that's what the Fed does, eight times a year, before each FOMC meeting, to hundreds of contacts throughout the country. It's a simple question, "How's business?" And while we have to keep the answer in perspectiverelative to quantifiable data and economic forecastssuch anecdotes can still provide useful insight into the economy.
While we're on the matter of keeping things in perspective, I would also direct your attention to another article in this Region, this one about the millennium bug problem, or Y2K. Much has been written, and with varying degrees of prudence, about the effects of the century date change and the possible disruptions that may occur. Some of these scenarios involve something near and dear to most of us: our money. But I can assure you that the Federal Reserve has been working with the banking industry to ensure that checks will clear, ATMs will dispense cash, automatic payments and direct deposits will transfer smoothly, and the new year will dawn like any other. The Fed has even prepared to have $50 billion in extra cash available for those inclined to keep extra dollars on hand.
That isn't to say that some problems might not occur, but they should be minor and readily corrected; besides, in today's sophisticated and multi-layered financial system, if a problem occurs at one point in the system, there are usually other options available.
There is another important consideration with Y2K that consumers and businesses should bear in mind: the probability of a recession. Despite what some prognosticators are warning, there is no reason to believe that a recession will occur because of the century date change. That doesn't mean a recession can't occur, it just means that the century date change alone will not cause the U.S. economy to falter to that degree.
In that regard, it is perhaps telling that Chairman Greenspan did not even mention Y2K in his February Humphrey-Hawkins testimony before the Senate Banking Committee until he was asked specifically about the issue. "One thing we're sure of," Greenspan said in response to a question about consumer confidence, "is they will not lose any money because our computer systems are not going to crash."
Finally, just a few words about economic education. As readers of this magazine may recall, we devoted the previous issue of The Region to economic literacy, and offered our own definition of what it means to be economically literate. The response to that issue was strong and, for us, gratifying, since we consider economic education as part and parcel of our communications effort. Once again I would direct you to another page in this magazine; this one includes just a few of the comments we have received on the issue of economic literacy.
We distributed about 5,000 extra copies of the December Region (and could have parceled out many more had they been available). Also, we've heard from a number of educators that if they could only get their students to understand the cover illustration, then they would accomplish almost all they need to teach their students. To that end, one college in southern Florida asked permission to enlarge and frame the cover photograph into a poster. We happily obliged, of course, and would encourage educators to use any of the magazine as they see fit.
This won't be the last you will hear about economic literacy from this bank. The Minneapolis Fed, in partnership with Minnesota Public Radio, will hold a national symposium on the subject in May at our bank, and the results will appear in this magazine.