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
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.