The individual forecasts provided qualitative assessments about both the current state and the future direction of the economy. These two types of assessments were analyzed separately. We scored each statement using an optimism-pessimism scale that ranged from - 1 to 1 with gradations or steps of 1/4
For example% 1 was assigned to any quotation indicating that the economy was doing very well and would expand strongly. Statements that the economy was already in a deep recession, or would be in a particularly had recession, were given a score of - 1. Any citation indicating the economy's direction was unclear was given a 0. Table 1 presents the relationship between the scores and the paraphrased statements.
Table 1, Criteria for Scoring Qualitative Forecasts
General Mindset Score Condition Diagnosed or Forecast
Optimism 1 The economy is strong or will expand
very strongly
3/4 The economy is growing
normally or will definitely continue
to grow
1/2 The economy is growing at a "modest"
pace or will do well barring
unforeseen events
1/4 There is some risk of a recession or
downturn < 30%, or the economy will
still grow
but slower than usual
Neutral 0 It is unclear where the economy is
or where it will go because the
signs are mixed
Pessimism 1/4 The economy is visibly slowing,
"decelerating," or there is quite a
bit of risk of a recession,
>30% but <60%
-1/2 The economy is "sluggish'7, barely
growing, or there is >60% risk of
recession
-3/4 The economy is declining, will
contract, or there are mild
recession conditions
-l Recession conditions are here or
imminent and it is worse than any
recession in recent history
Separate scores were assigned to statements about the current
situation and to projections about the future condition of the economy.
We thus could separately examine the economists' assessment of the
current situation and their forecasts of the future on the
aforementioned scale. Two time series of these scores were then
constructed by averaging the scores of the individual forecasts made in
each month--one time series for the statements about the present and
another about the future.
Validation of the scoring procedure
Goldfarb and others [2005] validated their methodology by comparing their scores for the forecasts made with the monthly analyses of economic conditions published in the 1929-30 issues of the Federal Reserve Bulletin. Similarly. we verify the appropriateness of our scoring of the business economists' qualitative statements by comparing our results with an analogous scoring of the qualitative statements in various issues of the Federal Reserve Beige Book. Compiled periodically by each of the 12 Federal Reserve Banks, the Beige Book is a qualitative analysis of economic conditions within each Banks region. (3) Released two weeks before each FOMC meeting, the Beige Book contains information about the state of the US. economy that the FOMC considers in setting monetary policy. The Beige Book is important in this decision context because it becomes available before certain official U.S. macroeconomic data are released.4 Although this information is anecdotal, previous research showed that the Beige Book generally provides valid information about the current direction of the U.S. economy [see Fettig and others 1 999; Balke and Yucel 2000; Ginther and Zavodny 2001; Balke and Petersen 2002; and Armesto and others 2009].
A comparison of the Beige Book information with our scores poses several possible technical problems. The first involves timing. While our data constitute a time series of monthly observations, the Beige Book is not published monthly because the FOMC meets on'ly eight times a year. Thus, there are missing observations for some months.
Second, economic conditions are described differently across the Federal Reserve districts. Some branches tend to be much more conservative in their descriptions while others use more extreme language to describe similar events. Thus, the scores assigned to each Banks statements may not be consistent. Finally, it has also been noted that some districts are better than others at accurately gauging the state of their regional economy: some seem to focus only on the city where the district bank is located [Armesto and others 20091. Despite these potential discrepancies, most analyses that scored the Beige Book statements and compared them with actual macroeconomic data fOUnd that this source generally tracked the U.S. economy well. Therefore, we can be relatively confident thai by using the same scoring scale and adjusting for missing dates. the beige Book should be an excellent benchmark for evaluating the business economists statements about the U.S. economy.
The closing date ['or collecting data for the Beige Book was used to determine the date to which the average scores was attributed. For example February 26, 2007 was the closing date for collecting data that were in the March 2007 report. Consequently, the date assigned for the inFormation in the March Beige Book was February 2007.
In scoring the statements in every Beige Book, particular attention was paid to the primary sentence that described the state of each regional economy. The scorings were identical to those applied to the Wall (5) freer Journal articles, but with particular attention paid to key words, such as "modest growth and 'sluggish growth.' The Beige Book score assigned to each month was the average of the scores obtained from the statements of 12 Regional Banks.
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