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GDP Growth Revised Higher, but Outlook Still Treacherous

Stocks in this article: SBUX

NEW YORK ( TheStreet) - Gross domestic product growth was revised up for the second quarter to 2.5% from 1.7%, because the trade deficit was much smaller than originally estimated and investments in inventory were revised upward.

The trade gap remains a substantial drag on economy and continued improvements will be needed for stronger growth. Continued slow growth in consumer spending indicates household balance sheets have not strengthened enough to instigate more robust growth in the second half of the year.

Small businesses are expressing more optimism through sentiment surveys; however, they are not spending enough on new structures and capital goods to ignite stronger growth.

Businesses of all sizes remain wary about ObamaCare mandates, more cumbersome and costly business regulations, and global economic and political conditions. Managers are inclined to squeeze more production out of existing facilities to meet moderately growing demand, and remain cautious about adding full-time workers.

Since January, 936,000 more Americans report working part time, while only 27,000 more say they have obtained full-time employment. This shift places downward pressure on wages, which have increased less than 1% over the last six months.

Rising mortgage rates in anticipation that the Federal Reserve will scale back purchases of mortgage-back securities and longer-term Treasury debt are slowing new home sales.

Overall, economists expect growth to continue at a somewhat stronger pace in the second half, but that will require continued improvements in the trade deficit, stable oil prices, and for Congress and the president to reach an agreement to raise the debt ceiling in October with not too much drama.

The failure of House Republicans, Senate Democrats and President Obama to reach a compromise on the fiscal year 2014 budget is less menacing. A continuing resolution to maintain current outlays, subject to further spending cuts through sequestration, would slow the economy much less than a compromise budget. The latter would almost certainly entail higher taxes to appease the president, and the tax increases he obtained in January are already slowing growth and jobs creation.

Since mid-2009, growth has averaged a paltry 2.2%, whereas following a deeper recession, the Reagan recovery produced 5% growth over a comparable time span.

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