The Beige Book and the Business Cycle: Using Beige Book Anecdotes to Construct Recession Probabilities

The Federal Reserve releases the Beige Book prior to each Federal Open Market Committee meeting. The report is a narrative based on anecdotal and qualitative information collected from a wide range of contacts in each of the 12 Federal Reserve Districts. We take the lexicon approach to text analysis to create sentiment indexes that track changes in economic conditions from the very first Beige Book in May 1970 to the most recent (at the time of writing) in October 2024. We create additional indexes to account for various current-event shocks, such as political events or natural disasters that distort typical sentiment measures. We find that the real-time recession probabilities derived from a probit model featuring only the created sentiment and shock indexes are closely correlated with NBER recession periods, and more accurately indicate business cycle turning points than other widely cited measures. We find that the Beige Book can be used to promptly identify periods of economic recession as our model typically allows us to date business cycle turning points far in advance of the official announcements made by the National Bureau of Economic Research’s Business Cycle Dating Committee.