Reports from the 12 Federal Reserve Banks will add color to the economic picture when the Beige Book drops on Wednesday. It’s a revered source of anecdotal economic data — but it’s also come under a bit of scrutiny by the Dallas Fed.
Their recent analysis shows that since the pandemic, the anecdotal data reflected in the Beige Book has painted a more muted picture of economic growth than the hard data, and this got us thinking. In uncertain economic times, like today, which can we rely on more: hard data or soft data?
Gross domestic product, unemployment and other hard data are great at measuring the economy behind us. But Drake University economics professor Sean Severe said the same isn’t true when we use it to make decisions about the future economy.
“It's almost like you're trying to drive the car by looking in a rear view mirror, so you can only see what happened in the past; you’re trying to figure out what’s on the road right now and what’s on the road ahead of you but you’re looking in the review mirror to figure out if you’re turn is coming up,” he said.
That’s where anecdotal information can be useful looking ahead, especially when economic conditions are changing, said Dallas Fed senior business economist Laila Assanie.
“Because when the economy is at a turning point, the anecdotal data often will signal those changes before you see it in the hard data,” she said.
In other words, said Tatevik Sekhposyan, an economics professor at Texas A&M University, “It's forward looking. It's available more frequently and earlier.”
She said anecdotal data can be useful for predicting the future economy. But it’s also less quantifiable, objective and reliable.
“It also is prone to other fallacies of human mind,” Sekhposyan said.
So which is better? John Diamond, senior director of the Center for Tax and Budget Policy at Rice University’s Baker Institute, said especially in shaky times like today, we really shouldn’t have to choose.
“Hard data is bad because it's usually looking back … It can often lead you down the wrong path,” he said. “But yet, the uncertainty also makes small data more unreliable.”
He said in uncertain times, economists have to lean on both.
