KEY DATA: GDP: +1.2%; Consumption: +4.2%; Private Investment: -9.7%; Consumer Inflation: +1.9%/ ECI (Over Year): +2.3%; Wages: +2.5%

IN A NUTSHELL: “The consumer is spending, but the failure of the corporate sector to invest is restraining growth.”

WHAT IT MEANS: The economy is moribund – maybe. Second quarter growth was well below expectations, but the details are not as negative. First of all, households went out and spent money like crazy on everything. Energy, even adjusting for prices, was the only major category posting a decline. But then there was the business community. Investment in structures and equipment fell sharply. There was a moderate increase in spending on intellectual capital. But the real killer in the report was a huge reduction in inventories, which cut growth in half. This was the first drop in inventories in nearly five years. In addition, government at all levels throttled back spending. Interestingly, the trade deficit actually narrowed, which helped growth. Exports rose modestly while imports were down a touch. Even with the business sector cutting back for the third consecutive quarter, the key measure of the domestic economy, final sales to private domestic purchasers, was up solidly. That shows the heart of the U.S. economy is still moving ahead decently despite the weak topline number. Consumer inflation rose at the fastest pace in two years but over-the-year, it is still well below the Fed’s target rate.

On the labor compensation front, employment costs rose moderately in the second quarter. Looking at the data over the year, though, there was a sharp acceleration in wages and salaries, especially in the private sector. The government, in contrast, has kept wage gains from accelerating, though it is doing a worse job in controlling benefits. At least on the wage side, the increases are back to what was common in much of the 2000s. In contrast, benefit costs are growing at less than half the previous decade’s pace. And I thought health care costs were surging.

MARKETS AND FED POLICY IMPLICATIONS: Today’s numbers create a real conundrum for the Fed. Overall growth is too low for the members to argue a rate hike is needed or even warranted. But the report’s composition implies there is decent underlying growth as government spending is not faltering and inventories will be rebuilt. Inflation remains low, but has accelerated. Labor costs are also on the rise, which should tell Chair Yellen that the slack is disappearing. But most importantly, the annual revisions to GDP, which came out in this report, show how the Fed’s use of current data is a true mistake. While annual growth rates for the past few years were not change significantly, some of the quarterly numbers were revised sharply. For example, most of us were calling for a rate hike in the first half of 2015, but the Fed backed off because growth was supposedly weak. First quarter growth was 0.6% – at least that is what everyone thought. Wrong! After criticism by Steve Liesman of CNBC that the first quarter numbers seemed to be systematically understated, the government went back and researched the issue. He was right and now the Bureau of Economic Analysis puts first quarter 2015 growth at 2%. Would the Fed have nudged up rates if it knew that was the real growth rate? Possibly. More importantly, in an environment of volatile data and major revisions to numbers (GDP revisions average about 1.2 percentage points!), basing monetary policy on current data is like driving with a broken windshield: Don’t be surprised if you wind up in a ditch. But this Fed doesn’t seem to be overly concerned about using suspect data and this dumb data dependency will likely continue. As for investors, they will probably look at the top line number, say the sky is falling and react accordingly.