Jun 25, 2020 - Economy

The shape of our recovery

Illustration of an American flag with the fifth red strip forming a 'reverse radical' line.

Illustration: Aïda Amer/Axios

It's not a U, it's not an L, and it's definitely not an I. America's economic recovery from the coronavirus shutdown has already started. In economists' shorthand, that means it's a V (a sharp rebound), a W (a nasty double-dip), or, most likely, something in between.

Why it matters: The shape of the recovery will directly affect the future of millions of unemployed Americans. It will also determine whether small business owners, in particular, will be able to restart their entrepreneurial careers after being forced to shut down during the pandemic.

Context: One big fear in March and April was that America would see no real economic recovery so long as the pandemic remained out of control. In May, however, we saw more than 40,000 deaths from COVID-19 — and we had the largest monthly employment gain in American history, with 2.5 million new jobs being created.

  • Be smart: The consensus among economists is now that we'll see a "reverse radical" recovery. Think of a backwards square-root sign, where there's a sharp drop, a relatively small bounce back, and then a long period of subpar growth.

The best-case scenario is a V. White House economic adviser Larry Kudlow, for one, is sure the economic recovery will last: "I think we're off to the races in what will be a very strong V-shaped recovery," he said this week.

  • The case for a V is based on the idea that even if the number of new coronavirus cases is remaining stubbornly high, the number of new coronavirus deaths is falling steadily. So long as that trend remains in place, the U.S. economy is likely to continue to move back toward some semblance of normality.

The worst-case scenario would be a "W." Federal Reserve vice chair Randal Quarles is telling banks to prepare for "a W-shaped double dip recession with a short-lived recovery followed by a severe drop in activity later this year due to a second wave of containment measures."

  • While virus-related lockdowns remain the biggest risk, economists also worry about the fact that May's surprisingly good economic data were driven in large part by hundreds of billions of dollars of temporary government stimulus.
  • The $1,200 checks, along with an extra $600 per week for anybody claiming unemployment assistance, actually caused personal incomes to rise in April.
  • If and when the free money runs out, the mini-boom could be over. At that point we could fall back into a "W-shaped" recovery — or even a double-dip recession.

By the numbers: According to BofA Securities' global fund manager survey, the proportion of investors expecting a V-shaped recovery rose from 10% in April to 18% in May — but was still dwarfed by the proportion expecting a U-shaped or W-shaped recovery, which fell from 75% in April to 64% in May.

Reality check: Many major industries, from live entertainment to air travel and even in-person shopping, remain in a dire economic condition. They still have no real visibility for when or how they might return to a pre-pandemic state of health.

  • International trade is looking very weak. Borders went up quickly once the virus hit, and will go down much more slowly.
  • State and local governments also seem certain to lay off millions more workers in the coming months, given the unprecedented magnitude of their budget crunch.

The bottom line: "We don't have a word for being in a depressed economy that's growing," says Heidi Shierholz, senior economist at the Economic Policy Institute.

  • Even a fast recovery will take place amid double-digit unemployment rates and the shuttering of millions of small businesses. That's nothing to celebrate.
Go deeper