Well, if the Fed is truly data-dependent, September is now squarely back on the table following the first revision of (double seasonally-adjusted) Q2 GDP data which soared from 2.3% to a whopping 3.7%, blowing out the Wall Street consensus estimate of 3.2%, and printing above the highest Wall Street forecast (the 3.6% from JPM).
This is what the BEA said about the source of the upside:
The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), exports, state and local government spending, nonresidential fixed investment, residential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.
The acceleration in real GDP in the second quarter reflected an upturn in exports, an acceleration in PCE, a deceleration in imports, an upturn in state and local government spending, and an acceleration in nonresidential fixed investment that were partly offset by decelerations in private inventory investment, in federal government spending, and in residential fixed investment.
Here is the breakdown:
But the real reason for the surge is shown in the chart below: from an inventory build of $124 in the first GDP estimate, the BEA now sees a total of $136.2 billion in inventory build in Q2. This is an all time record, and a number which suggests the upcoming inventory liquidation will be truly epic, not to mention recessionary.
So, paradoxically, as the market bulls scramble to find some bad news in this report which in isolation puts a September rate hike back on the table, the reality is that the inventory liquidation is result in a tumble in Q3 GDP (or Q4, or Q1 2016 - whenever it does take place). As such, the market bulls can point to the latest Atlanta Fed "nowcast", which after yesterday's "strong" durable goods number was revised from 1.3% to just 1.4%.
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 was 1.4 percent on August 26, up from 1.3 percent on August 18. The forecast for real GDP growth increased 0.1 percentage point to 1.4 percent after this morning's advance report on durable goods from the Census Bureau. The report boosted the model's forecast for equipment spending in the third quarter from 7.7 percent to 8.9 percent, and led to a slight improvement in the contribution of real inventory investment to third-quarter GDP growth.
As a result of the record increase in inventories, expect the Atlanta Fed to promptly cut its already painfully low Q3 GDP estimate, which may just be the hook the Fed will use to avoid hiking rates in three weeks time.