Surveying the Economic Landscape: Economists Use a Variety of Tools to Gauge Economic Performance, Including Surveys on Retail Sales, Consumer Sentiment, and the Unemployment Rate. the Federal Reserve Also Conducts Its Own Surveys to Contribute to the Overall Economic Picture and Help Inform Monetary Policy

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Much of what we know about our nation's economy comes from one survey or another. Consider the U.S. Bureau of Labor Statistics' employment situation report, which combines data from two surveys and provides us with the unemployment rate and a measure of household income, among other features. The retail sales report, generated from a survey of approximately 13,000 retailers conducted by the U.S. Census Bureau for the Department of Commerce, provides a measure of the health of the all-important consumer sector, the main driver of the U.S. economy. Another important survey is the Institute for Supply Chain Management's (ISM) Manufacturing Survey, which gauges the health of the manufacturing sector by polling approximately 400 purchasing managers across the country.

Indeed, these surveys create a foundation for understanding the current state and trajectory of the U.S. economy, but they don't paint a complete picture. To address lingering questions about the state of the economy, over the years, Federal Reserve Banks and the Fed Board of Governors have created their own surveys. What motivates the Fed's efforts to improve on an already large body of available data? It's the simple fact that the overall quality of economic data (as measured by depth, timeliness, and other factors) can help determine the effectiveness of monetary policy.

Given the widely felt impact of its policies, one would expect no less from a monetary policymaking body like the Fed. While some data may be merely informative to those outside the Fed, they can be crucial for policy makers trying to understand the effectiveness of current monetary policy and when considering future policy. For example, information on inflation expectations is one topic that provides unique insight but has not been fully represented in existing data sources.

Taking a closer look at inflation

Inflation expectations have long been an area of interest for policymakers, economists, and academics, as they provide an indication of the future path of inflation as well as a measure of the effectiveness of Fed communications (judging how well anchored they are around the inflation rate target). Are expectations for future price increases well anchored? Have they changed over time? How will these expectations affect firms' behavior? These are a few important questions a survey can address.

Although a long-standing measure of consumer inflation expectations exists in the University of Michigan Survey of Consumer Sentiment, expectations of companies--the price setters, after all--went unmeasured until the creation of the Atlanta Fed's business inflation expectations (BIE) survey. This monthly survey measures the short- and long-term inflation expectations of firms as well as the current business conditions in which these expectations are formed. Firms' inflation expectations are particularly important because they factor into companies' pricing and wage decisions, which ultimately influence the overall price level. Thus, if accurately measured, they could prove to be a leading indicator of inflation.

Quick takes on what's happening in the marketplace

In addition to these unique data needs, Fed policymakers in some cases may also require timelier reporting. The Fed's tools for achieving its dual mandate of price stability and maximum employment work on a lag. In other words, the effects of monetary policy take time to filter through the economy. Therefore, it's important for Fed policymakers to spot economic trends early so they can address problems in a timely manner. In some instances, Fed surveys are created to provide an early indication of changes in economic activity or inflationary pressures in an effort to stave off undesirable fluctuations in price and employment levels. The Federal Reserve's Beige Book is a good example of a data source specifically designed to provide current information when policymakers need it most. …