Which (alphabetic) shape will an economic recovery take? Depends on how long we're shut for
Snacks / Thursday, April 09, 2020
How many letters in an economic recovery?... Apparently, four. We know the economy has tanked since February — the COVID-19 pandemic spelled an abrupt end for the longest economic expansion in US history. Now economists are sifting through alphabet soup to determine what shape a recovery from this looming recession will take. The four main contenders:
- V Shape: A quick and dramatic decline (check), followed by an equally quick recovery (not check). The economy needs to reopen ASAP if we want this best-case scenario to happen — and we may already be too late.
- U Shape: More gradual than V shape — the economy finds a bottom and stays there for a while (up to 2 years before recovering). Most recessions since 1945 have been U shaped.
- W Shape: AKA, a "double-dip" recession. This would happen if, after a V recovery, we have another big outbreak and the economy has to shut down again.
- L Shape: Worst-case scenario — more like a non-recovery. A steep decline followed by a long stay at the bottom (could take up to 10 years to recover). That's the (depressing) letter Barclays bank just highlighted.
Which one will it be?... It depends on how long the economy is shut down for. And that largely depends on how quickly we can get the virus under control. Each day the economy is closed means more unemployment and more business losses — so recovery time increases daily.
The Multiplier Effect is a powerful thing... Your spending (or lack thereof) = someone else's income (or lack thereof):
- You spend $50 on a jean jacket at a local store. The store owners makes $50.
- They pay their salesperson, then order more jackets from Levi's, which in turn pays its own employees and the fabric suppliers.
- The Levi's employees and the supplier's employees spend that money for their own purchases, and the cycle continues.
- Right now the multiplier effect is working against us — the longer that's true, the longer a recovery will take.
Latest Stories
Sherwood Media, LLC produces fresh and unique perspectives on topical financial news and is a fully owned subsidiary of Robinhood Markets, Inc., and any views expressed here do not necessarily reflect the views of any other Robinhood affiliate, including Robinhood Markets, Inc., Robinhood Financial LLC, Robinhood Securities, LLC, Robinhood Crypto, LLC, or Robinhood Money, LLC.