Sustainable recovery is an illusion

After a shocking -2.9% Q1 GDP print for 2014, all eyes are on this weeks upcoming first look at Q2 GDP.

The ‘blame it on the weather crowd’ are looking for a 3% or higher print, and have been encouraged by strong non-farm payroll reports over the past few months, whilst economists like Gary Shilling made headlines earlier this week stating the number would be closer to 1%, or even negative

Stepping back from the hoopla though, what is the bigger question that markets, investors, analysts, central bankers, politicians and commentators are trying to answer when looking at a data print like this

Surely there is only one, and that is this; “Is the US on the verge of a sustainable economic recovery”.

To answer that question, its important to probably first define what a sustainable economic recovery really is, and to this analyst, it would require at least four key planks

• An end to central bank debt monetisation

• A normalization of interest rates (both at the short and long end of curve)

• Balanced budgets in Washington (running surpluses can wait)

• Structural reform of the clearly unaffordable social welfare state

Whilst it looks like the Fed will succeed in fully tapering QE3 at this point, it’s far too early to say that the days of US money printing are behind us. Remember they successfully tapered QE1 and QE2, but had to come back bigger and badder with QE3

It would take a brave person to bet there’ll be no QE4 in the future

As to the other three, they haven’t even started. Normalisation of interest rates (not just a 0.25 or 0.50% hike) is years off, whilst structural reforms have long been in the too hard basket of any aspiring politician with eyes on the White House.

As to the budget deficit, yes, in percentage terms its declined, but its still north of $500bn a year, and the CBO’s latest projections show year after year of additional debt build up in the coming decades.

Bottom line: No matter what comes out of this weeks GDP print, the sustainable recovery we’re all hoping for is but an illusion.