The Shape of Economic Recovery

economics Aug 16, 2020

If you are lost with all the numbers letters and shapes being thrown around to describe our current markets, don't worry you are not alone.

So what do all the letters mean?

Economists traditionally view economic recessions and recoveries as having a shape, named after the letter it resembles.

V-shaped — a rapid fall followed by a quick rebound to previous levels. The 1990-91 recession, which lasted only eight months and was followed by strong economic growth, was V-shaped. This type of recovery would require control of COVID-19 through testing and treatment, a quick ramp-up of business activity, and a return to pre-recession spending habits by consumers.8-9

U-shaped — an extended recession before the economy returns to previous levels. The Great Recession, which lasted 18 months followed by a slow recovery, was U-shaped. If COVID-19 takes longer to control and the economy does not bounce back as expected in the third quarter, the current recession could be prolonged.10-11

W-shaped — a "double-dip" recession in which a quick recovery begins but drops back sharply before beginning again. The U.S. economy experienced a W-shaped recession in 1980-82, when a second oil crisis and high inflation triggered a brief recession, followed by a quick recovery and another recession sparked by overly aggressive anti-inflation policies by the Federal Reserve. This type of recession could occur if a second wave of COVID-19 forces businesses to shut down again later in the year, just as the economy is recovering.12-13

L-shaped — a steep drop followed by a long period of high unemployment and low economic output. The Great Depression, which lasted 43 months with four straight years of negative GDP growth, was L-shaped. This is unlikely in the current environment, considering the strength of the U.S. economy before COVID-19 and the unprecedented economic support from the Federal Reserve.14-15

A swoosh

In the July Economic Forecasting Survey by The Wall Street Journal, which polls more than 60 U.S. economists each month, 13.0% of respondents thought the recovery would be V-shaped, 11.1% expected it to be W-shaped, 5.5% indicated it would be U-shaped, and none thought it would be L-shaped.16

The vast majority — 70.4% — believed the recovery would take a "Nike swoosh" shape, which suggests a sharp drop followed by a long, slow recovery.17 This view factors in the possibility that businesses may be slow to rehire, and consumers could be slow to resume pre-recession spending patterns. It also considers that some businesses may be impacted longer than others. Airlines do not expect to return to pre-COVID passenger activity until 2022, and movie theaters, beauty salons, sporting events, and other high-contact businesses may struggle until a vaccine is developed.18

Adding to the prognosis for a slow recovery is the fact that the rest of the world is also fighting the pandemic, including many countries where growth was already more sluggish than in the United States. And if the virus resurges in the fall or early 2021, the recovery may turn jagged with significant setbacks along the way.19

While the general consensus suggests that the duration of the actual recession may be brief, it is much too early to know the true shape of the recovery. However, the economy will recover, as it has in even more challenging situations. All of these projections indicate that a key factor in determining the shape of recovery will be control of COVID-19. Beyond that, the underlying question is whether the virus has fundamentally changed the U.S. and global economies.

Regardless of the letters or shape recovery takes, as an investor you need to ensure that you have an investment strategy that is designed to help you minimize your downside while maximizing your upside potential.

As always, stay safe as we chart a path in uncertain waters.

~ Leibel

P.S. Here is a great piece that Kens5 news did on the 5 shapes of recovery and what they mean.

 

 

1-2, 8, 10, 12, 14) National Bureau of Economic Research, June 2020
3, 5, 15) U.S. Bureau of Economic Analysis, June 2020
4) Federal Reserve Bank of Atlanta, July 9, 2020
6, 16-17) The Wall Street Journal Economic Forecasting Survey, July 2020
7) Federal Reserve, June 10, 2020
9, 11, 13) Forbes Advisor, June 8, 2020
18-19) The Wall Street Journal, May 11, 2020
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