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Beige Book: Only part of the story

The Federal Reserve released its latest Beige Book on June 8. The Beige Book is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by district and sector. An overall summary is prepared as well. Much attention is paid to the first sentence of the summary and the first sentence of each Bank's report because they give an overall take on conditions as reported.

The first sentence of the summary for the June 8 report reads:

"Reports from the twelve Federal Reserve Districts indicated that economic activity generally continued to expand since the last report, though a few Districts indicated some deceleration."

The following recounts the first sentence of each Reserve Bank's submission:

  • Boston: Many business contacts in the First District report improving economic conditions.
  • New York: The Second District's economy has continued to expand since the last report, though at a somewhat diminished pace.
  • Philadelphia: Business activity in the Third District has improved overall since the last Beige Book, although the pace has softened.
  • Cleveland: Business activity in the Fourth District continued to expand at a modest pace since our last report.
  • Richmond: Economic activity has been sending increasingly mixed signals since our last report.
  • Atlanta: Sixth District business contacts reported that economic activity moderated somewhat in April and May.
  • Chicago: Economic activity in the Seventh District expanded more slowly in April and May.
  • St. Louis: The economy of the Eighth District has continued to expand at a moderate pace since our previous report.
  • Minneapolis: Economic activity in the Ninth District grew steadily since the last report.
  • Kansas City: Growth in the Tenth District economy remained solid in May.
  • Dallas: The Eleventh District economy expanded at an accelerated pace over the past six weeks.
  • San Francisco: Twelfth District economic activity continued to expand at a moderate pace during the reporting period of late April through the end of May.

While the Beige Book is an important instrument in reviewing recent economic developments across Reserve Banks, it's important to understand the context of the individual Bank reports. (By context, I mean the broader picture of economic performance across regions.)

One way to do that is to look at overall economic activity in each region, and the Philadelphia Fed's State coincident indexes is a useful tool to do just that. The Philadelphia Fed produces monthly coincident indexes for each of the 50 states that combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state's index is set to the trend of its gross domestic product (GDP), so long-term growth in the state's index matches long-term growth in its GDP.

In the chart below I use the state indexes to ascertain the depth of the downturn and the extent of recovery experienced by each Federal Reserve District. I weighed each state's coincident index by average state GDP from 2006–10 to develop a coincident index for each Reserve Bank. (A technical note: Most Federal Reserve Districts cut across state boundaries. In these instances I estimate the portion of state GDP that falls within Reserve Bank Districts that share the state in question. It's a back-of-the-envelope calculation. I could look at metro area GDP to be more precise, but for the purposes of this exercise I'm comfortable with this more basic approach. In other words, I didn't have time to do it, but I'm pretty confident that the results would be similar).

In chart 1, I calculate the percent change from peak-to-trough and trough-to-present for each Reserve Bank's coincident indicator. The red bar represents that peak-to-trough percent change—another way to look at it is that the red bars represent the depth of the recession experienced by each Reserve District. The blue bar is the percent change since the trough—or the extent of recovery.

Coincident Economic Activity

The Atlanta Federal Reserve District experienced at 10.8 percent decline in its coincident indicator during the downturn and has seen a 1.9 percent increase since the trough. The Chicago Fed's measure fell by more than Atlanta's but has come back handsomely since the trough. (Bill Testa of the Chicago Fed wrote about the Seventh District's resurgence in a recent blog post.) You can see the other Reserve Banks' measures in the chart as well.

Chart 2 combines the two percent changes presented in chart 1:

Coincident Economic Activity Net Percentage Change

The Atlanta Fed's measure is by far the weakest. Dallas and Boston are close to zero, indicating that their respective coincident indicators are close to where they were before the downturn began. So when you read that the Atlanta Fed reported in its Beige Book that "business contacts reported that economic activity moderated somewhat," it is particularly troubling. We have a long way to go, and any pause simply makes the time it will take to get back to where we were even longer.

Photo of Michael Chriszt By Mike Chriszt, an assistant vice president in the Atlanta Fed's research department

June 15, 2011 in Beige Book , Growth , Recovery | Permalink


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