Bureaucratic Fantasies

As trained Kremlinologists we were truly baffled by yesterday’s FOMC statement. Yes, we know, they are eager to hike rates at least once, just so they can prove they can still do it, but the comments on the US economy in yesterday’s statement sounded as if the entire committee had just spent the past month in a submarine with a defect radio.

Image credit: Heinz Edelmann

Here is a chart posted by John Hussman in his recent weekly missive, that illustrates US economic activity on the production side, a topic we have recently discussed extensively as well (see: “US Economy – Close to a Bust?” and “More Ominous Data Points” for details).

An amalgamation of incoming data from the Fed’s own district surveys via John Hussman

As we have pointed out, in terms of total spending and output, the manufacturing sector is the US economy’s largest sector by far (even if it is just 13% of “GDP”). It seems therefore pretty clear that when its most important components are in the kind of free-fall normally seen only in recessions, that something is seriously amiss.

It does not matter what has caused this. It is not somehow made “better” by the fact that the only just beginning bust in the oil patch is one of the main triggers. After all, this is how all economic busts begin: the sector with the largest extent of malinvestment keels over first. Moreover, the fracking boom was the by far greatest contributor to capex and employment during the entire post crisis recovery, so it’s demise is bound to make waves.

You can compare the once gain relatively terse FOMC statement with the previous one with the help of the WSJ’s trusty FOMC statement tracker. What makes it so funny is that all words of warning or caution are gone – the US economy’s soggy performance is described as “solid”, the troubles in submerging markets, which exercised Mr. Draghi less than a week earlier, no longer even rate a mention. In short, it’s really bizarre.