The phrase “V-shaped” recovery has been used significantly over the past several weeks by politicians, the media, and especially Wall Street. In short, this is their way of saying (and hoping) the economy will bounce back to its original output levels in the same fashion it contracted.
The issue with this narrative is that it contradicts how economies operate. Let’s look at an example of a contractor who does home renovations, many of whom have been out of work amid social distancing, essential worker mandates, etc.
For the sake of this example, let’s assume the virus is under control in a month or two and everyone starts going back to work. How many average homeowners are going to jump into a renovation project when the virus clears? While there isn’t a specific answer to that question, many will be opting to pay off credit card debt accumulated from being laid off, having reduced hours, decreased pay, etc. Or the current financial fear among much of society will have many saving more towards their rainy-day fund. Whatever the case, a home remodel is not going to be at the top of the list for many.
As such, the home renovation contractor will be back to work too, but with a reduced workload given the aforementioned. Is the contractor focused on making ends meet or out shopping for new furniture? Does the contractor buy the new truck he was planning on getting, or pay down debt accumulated during the shutdown? Is the contractor going out to dinner and/or supporting local business – maybe, but it’s likely reduced.
While the contractor was just one example, you can imagine the many similarities. This has a “ripple effect” for much of society, in most industries. It's not just the contractor, it’s the truck dealership, the furniture store, local business, etc. This is all interconnected and is how the economy works.
We will see a material spike in economic productivity when that “all clear” signal comes – with much of society returning to work. However, when that happens, it won’t be like flipping a switch, returning the economy back to normal; there will be longer term implications before we are back to our previous output levels. In other words, we could see a “W-shaped” recovery, with the middle section of the “W” representing increased output from society returning to work, and then future declines as a result of the previously discussed “ripple effect”.
It’s no secret the U.S. economy was in the late stage of the economic cycle. GDP had been slowing on a rate-of-change basis since the third quarter of 2018. Yes, COVID-19 is driving the sharp economic downturn, but unfortunately, the dual impact from shutting down the economy, on top of an economy that was already slowing will have a compounding effect.
The objective of this writing is to not create fear, but to provide education and perspective on what could very likely happen. Hope and optimism are powerful, and I truly believe in the power of positivity, but unfortunately, that does not always drive the underlying principles of basic economics.