US economy grew 4.2 percent in Q2, but weaknesses remain

The US economy grew slightly more than expected during the second-quarter, but there is  still a lot more work to be done to fully recover from the economic crisis, experts say.

Gross domestic product (GDP), the calculation of goods and services produced in the US, grew at a revised annual rate of 4.2 percent in the second-quarter, according to numbers released by the Bureau of Economic Analysis Thursday. That growth is slightly more than the 4 percent the department had predicted last month, and more than the 3.8 percent economists surveyed by The Wall Street Journal had expected. The growth comes after a 2.1 percent decrease in GDP for the first-quarter of the year. 

"It's a good number, but its hard to read a lot into, because we are coming out of bad winter when people didn't want to spend a lot of money," said Christian Weller, professor at the University of Massachusetts in Boston. "A lot of the growth was pent-up demand from a winter when people didn't want to go out and spend a lot of money." 

He said there are still three major weak spots in the economy: government spending, housing sales, and the trade deficit. Though real residential investment, which consists of purchases of private residential structures, grew at 7.2 percent, Mr. Weller said the number should be in the double digits.

"Coming out of very weak quarters, the number in the spring isn't all that great," Weller said. "It has to do with reluctance on the part of consumers and banks, who aren't keen on lending with low interest rates."

While the amount of exports grew 10.1 percent in the quarter, total imports was 11 percent. Weller says that the growing gap between total imports and exports is causing us to borrow money abroad and slowing growth. Without closing the trade gap and increasing government spending, which has stalled because of spending cuts, solid growth in the economy is going to be hard, Weller said.

Though consumer spending hasn't increased as fast as expected, only 2.5 percent in the second quarter, The Monitor reported in June that consumer confidence is on the rise.

The University of Michigan said Friday that its index of consumer sentiment rose slightly to 82.5 in June from 81.9 in May. That is still below April's reading of 84.1, which had been the highest in almost a year.

Confidence "has remained largely unchanged for the past six months," said Richard Curtin, an economist at the University of Michigan and director of the survey. "This was remarkable" given that the economy shrank in the first quarter.

On Thursday, the Labor Department announced that new jobless claims fell last week to 298,000, down from 336,000 a year ago, indicating that jobs are more secure. And July was the sixth straight month that employers added 200,000 jobs, the first time that's happened since 1997.

In her speech at the Fed's gathering in Jackson Hole, Wyo. last week, Federal Reserve Chairwoman Janet Yellen said the numbers were good but "it speaks to the depth of the damage that, five years after the end of the recession, the labor market has yet to fully recover." In October, the Fed will wind down its bond-buying program that has helped spur economic growth, and soon the Fed will raise short-term interest rates, which have been near zero since December 2008.

With the release of Thursday's number, the economy is expected to grow around 3 percent for the second half of this year, a number that Weller says is "descent." 

"The expected growth is about enough for new entrants in the labour market to get employed, but its not enough to change unemployment. For that you need much stronger growth, around 3.5 to 4 percent for a few years," Weller said, arguing that  lawmakers need to make changes to current fiscal policy for the US to have that kind of growth.