Does the Fed's Beige Book Forecast Negative Market Headwinds?

According to the Sept. 8, 2021, release of the Federal Reserve's Beige Book, the U.S. economy is facing many headwinds.

The report found that restaurants and the travel sector saw a drop in activity. Home and auto sales were low because of fewer available houses on the market and a challenging supply of computer chips for auto makers. The same report found that although more people have found work, the level of newly created employment was mixed, despite a continuing need for more workers. Due to people quitting their jobs, people retiring, and those unable to find means of suitable childcare, the employment situation remains uncertain. With continued stressors on the economy, how will the stock market fare through the rest of 2021 and into 2022?

The Beige Book, officially known as the Summary of Commentary on Current Economic Conditions, comes out eight times throughout the year. Information collection begins six weeks before, and the report is released two weeks prior to Federal Open Market Committee (FOMC) meetings, providing an overview of the economic health of each of the 12 districts of the Federal Reserve Bank.

The Sept. 8, 2021, Beige Book Report found challenges in different sectors; however, some challenges, such as the semi-conductor shortage, were faced nationally. Based on past analysis, current sentiment reported by businesses and consumers will be confirmed or dispelled by forthcoming data.

As Northwestern University’s Medill School notes, the Beige Book is devoid of formulas, statistical analysis or industry jargon. Rather, it contains observational and comparative data derived from speaking with and sampling business owners and business analysts. In contrast to statistical data, it illuminates what business executives and consumers are worrying about.

It's often referred to as a key gauge and is especially important because when the economy takes a downturn, the data deterioration often renders business statistics obsolete. It’s also relevant because the FOMC uses it to determine monetary policy chiefly via modifying the federal funds interest rate target. Similarly, when it comes to economic figures, it’s important to keep in mind the timeliness of such statistics because they are announced after they’ve been recorded.

During the coronavirus pandemic, especially when little was known in the beginning, the Beige Book offered Fed officials the ability to speak with industry insiders in the thick of it, especially when data was scant or unknown. Others observe that the Beige Book predicted the 2008/2009 housing crisis starting in October 2006 when mortgage delinquencies began appearing.

By viewing events in real-time, it offers anecdotal evidence compared to questionable forecasts. For example, the July 18, 2018, Beige Book Report found that well before the data confirmed manufacturers’ worries over the trade war with China and Trump’s tariffs, 10 districts reported “moderate economic growth.”

According to a 2003 study performed by Occidental College and the Federal Reserve Bank of Atlanta, the more confidence-inspiring news a Beige Book Report contains, the greater the correlation with higher interest rates, especially when it comes to long-term rates. It also expresses a bullish correlation with increases in stock prices when the economy is growing, but a deceleration during an economic slowdown. When banks set their lending rates, they directly or indirectly use long-term rates as reference. Policy makers also use this as an indicator for inflation expectations in the financial markets.

While no one has a crystal ball to predict how the economy and stock markets will perform going forward, the Beige Book is an important tool the Fed and those in the government factor in when attempting to steer economic growth.

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