Understanding the Beige Book

 So what is this Beige Book we hear about on the news? Is it the Fed Chairmans version of a Little Black Book? Not exactly, but it does carry a great amount of weight in the Feds decision-making, regarding interest rates.

The Beige Book is one of the main barometers of economic strength and economic rate of change. Also known as The Summary of Commentary on Current Economic Conditioning, this book provides economic vital signs, down to the regional level, eight times a year. It is posted at 2:15 pm EST two Wednesdays prior to the FMOC meetings.

This gauge of recent regional data will weigh heavily on the minds of the Fed prior to the FMOC meetings. It is broken down into several sections, the main part being the summary followed by the breakdown of the 11 federal districts, which is further subdivided by industry sectors. This regional nature also means that each regional report will not be uniform in relation to the others. Certain sectors will wield more influence in different districts, such as agriculture in the Midwest versus the East Coast or Advertising on the East Coast versus Midwest.

So grab a cup of java because its a fairly dry read and dont look for any opinions or commentary, just the facts. As a result, unless there are any surprises, you should not expect any major market swings. It will, however, validate current trends in various industries and will help guide your decision-making. In addition to providing crucial data for forecasting industry trends, it also provides insight to odds makers as to the direction of interest rates at the next FMOC meeting.

What I find useful, though, is the amount of detail the reports provide. It is no wonder that they post the report two weeks before the FMOC meetings because it could take that long to fully read and comprehend it. I do suggest that you not read it online, but print out the 30 pages and read them with a highlighter in hand, while making side notes.

The summary provides a great overview of the economy, but data provided regionally will clearly illustrate not only the trends, but the drivers of those trends. I suggest looking for imbalances in supply and demand in sectors, and ask yourself who would most benefit from those trends.

For investors who do top-down analysis, the Beige Book is a must read. Personally, I read the summary first; second, I read what a sector, such as Real Estate, is doing throughout each Federal District. Since they are divided by Federal Districts first, then by sectors relevant to that area, it results in a lot of thumbing around, highlighting, and notetaking. I prefer to go sector by sector versus reading it straight through because I can build a clearer picture of the industry versus just reading the 30 pages of dry material straight through. That is why I recommend printing it out versus just reading it from the website.

I find the material very useful though and it provides many refreshing angles on investments. It may validate my past market hypothesis as well as help me formulate new ones. It also shows me economic flags I never thought about. For example, the July 2006 Beige Book shows the correlation of the decrease in concrete sales in relation to a cooling real estate market. In addition, I recommend highlighting key words which indicate supply and demand irregularities, drivers which accelerate or suppress growth, and anything else impacting the rate of economic change.

I truly suggest that you go back and read Beige Books from past years to give you a better understanding of economic history. I am a firm believer that history tends to repeat, even at the micro level. By going back and reading the older Beige Books and looking for market patterns, past economic flags, and other indicators, you will be able to better sharpen your forecasting skills. As your familiarity with them increases, the amount of time you need to analyze the Book will shorten. The quicker and more accurate your forecast, the quicker you can anticipate market moves and capitalize on them.