This Is How The Much Anticipated "Second Seasonal Adjustment" Affected Q1 GDP

Much more important than the Q2 GDP print, which as we noted previously, will be revised as the wind blow first in one month, and then again, at the end of September, just after the Fed does, or does not, hike rates, what everyone was focused on was just how the BEA's "double seasonal adjustment" will boost Q1 GDP, which because it was negative would clearly have to print at least positive in a year in which the Fed is desperate to show it is in control with a 25 bps hike.

As expected, it rose: from -0.2% to 0.6%.

However, a look at the internals reveals a major surprise - while many said that the Q1 economy does not expose the true strength of the US consumer (instead of shopping in stores, they shopped online which wasn't captured or comparable), what actually happened was that Personal Consumption Expenditures as a % of GDP actually declined from 1.4% to 1.2% when netting out the harsh winter impact.

As in the real economic driver was even weaker and this time you can't blame it on the weather!

So how did Q1 GDP rise by 0.8% in absolute terms if consumer spending, that 70% driver of the US economy, declined?

Simple: BEA saw fit to boost Q1 CapEx (fixed investment) from a decline of -0.1% to 0.6%. And, the punchline, it used that traditional GDP plug, inventory, even more aggressively, with Change in private inventories rising 0.9% instead of the original 0.5% print.

Incidentally, that jump in fixed investment in Q1 was promptly nullified by the modest 0.1% increase in Q2 as oil companies put their CapEx spending even further on hiatus. Absent a jump in oil prices, expect Q3 fixed investment to print negative. As for inventories, at this moment the inventory to sales ratio is beyond ridiculous, and the only logical move next is for inventories, which rose by a whopping $110 billion in Q2 after increases of $112.8 billion and $78.2 billion in the two prior quarters, is sharply lower - a move which will likely catalyze the next US recession.