Economic Recovery Chart Looks More Like a ? Than a V or a W

Key Highlights

• Widespread agreement US economy soon to recover from COVID lockdowns
• Debate is whether recovery looks like V or W or L or Nike Swoosh

We’ve been thinking and writing lots about the pandemic recovery and what such a reboot chart might look like. “Rapid and V-shaped” or “double-dip and W-shaped” don’t really apply as we don’t know how consumers, slow to venture out of their homes so far, might respond over the next couple of months. Nor do we really know how many unexpected business closures there might be. And certainly we don’t know whether or not there will a second wave of COVID outbreaks.

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Economists and policy forecasters, instead of checking one box or another to signal one type of recovery, are now suggesting that we prepare for every type of recovery. Well, what does “every type of economic recovery” actually mean?

Larry Ludlow, director of the White House National Economic Council, said, “It’s really hard to model a virus, or a pandemic, the likes of which we haven’t seen in 100 years. You can have your own Vs; there’s Vs, there are lesser Vs. There are combos of Us and Vs.”

Acknowledging such uncertainty, the White House is NOT issuing its annual summer economic forecast this year, breaking with decades and decades of tradition.

Here are some possibilities AND caveats with these possibilities regarding our pending economic recovery:

1. The unrealistic V – swift recovery meaning the economy returns to its 2019 output level in just a few quarters
   1. JP Morgan’s chief US economist, Michael Feroli, thinks V stands for “Very Unlikely.”
      1. A shattering, one-time shock of high unemployment and low output linger.
      2. Add lower business capital spending and state/local budget cuts to that shock and it seems quite difficult for an economy to jump right back on track.
   2. Michelle Meyer, head of US economics at Bank of America Merrill Lynch, sees a 7% output gain in Q3 following a 40% plunge in Q2.
      1. Subtract 7 from 40 and you still have a -33% drop, or “residual damage.”
      2. Meyer thinks a full recovery could take as long as the end of 2022.
   3. L as in “Low Expectations” is the letter pessimists are using.
      1. Economy is already beginning to reawaken with more stabilized mortgage applications, consumer confidence is slightly rising, and unemployment claims are, though horrendous, slowing.
      2. Google data shows we’re moving around more and JP Morgan credit card series shows a slow, steady uptick in spending.
   4. W may signify “What’s Next.”
      1. This could be what the economic recovery chart looks like EXCEPT for two unknowns:
         1. Another infections spike
         2. Whether or not states would shut down again if there were a second infections spike
      2. Analysts favor not a letter shape here but a checkmark shaped recovery.
   5. A “checkmark,” a “Swoosh” and/or a “Wave”
      1. The Congressional Budge Office suggests an economic recovery to climb out the trough more slowly than the out-of-the-blue drop with a trajectory looking like a checkmark.
      2. There are lots of wild cards here…waves of infection, consumer behavior, a vaccine timeline, etc. Any or all of these unknowns could either impede or improve the trajectory.
   6. What’s the most likely scenario for the economic recovery?
      1. Richard Clarida, the Fed’s vice chair said it could take until early autumn to get more clarity.
      2. Ian Shepherdson with Pantheon Macroeconomics wrote in a recent research note, “The timing of a full recovery is unknowable.”

Looks like we’re left with a “?”

Thanks to Jeanna Smialek and Jim Tankersley with The New York Times.

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