There has been a lot of discussion about what type of recovery the economy is going through. A V-shape would be one where it recovers very quickly with no one left behind, a U-shape would take the economy a longer time but everyone would recover and a Square Root recovery is a bit of a misnomer since the latter portion of the recovery is higher than what was occurring before the downturn. What a Square Root recovery is meant to portray is a quick rebound but flat to no growth after the fast upturn.
There has also been talk about a W-shaped recovery where the economy largely recovers but dips back down before it regains momentum and gets back to where it was before the downturn. There is even a L-shaped recovery, which is probably the longest of all of these since it means the economy doesn’t get back to its trend line and is permanently damaged. The chart below from Visual Capitalist helps to depict them.
While it appears that the economy is on a slow but steady path upwards as seen in the New York Federal Reserve Bank’s Weekly Economic Index below, for thousands of businesses and millions of people reality is very different.
Three K-shaped recovery charts
Another shape that shows what is really occurring is a K-shaped recovery. This kind shows a portion of the population and businesses recover quickly and fully, while another suffers a great deal. Given the impact of Covid-19 and what it has done to the restaurant, bar, travel and hospitality industries it isn’t hard to realize that this is the type of recovery the U.S. is experiencing. As opposed to industries such as technology and some segments of retail, shown in the chart from the U.S. Chamber of Commerce, which have not just recovered but are doing better than before the coronavirus hit.
Opportunity Insights is a team of researchers and policy analysts based at Harvard University. One analysis they have developed is how unemployment is impacting workers of varying income levels. As can be seen in the graph below workers in the bottom quartile (people making below $27,000 per year) have seen their employment drop by almost 20% while less than 1% of those making over $60,000 per year have lost jobs.
The third chart portraying the K-shaped recovery comes from a National Bureau of Economic Research working paper in August. It analyzed what people did with the $1,200 stimulus checks (plus $500 per child) they received.
It shows that almost 40% of the respondents did not spend any of the money they received; they saved it or paid down debt. At the other extreme almost 30% spent the entire amount on durables, food, medical supplies, and other consumer products. The remaining 30% plus had a mixture of spending and saving. Those that needed the stimulus checks to make ends meet or to try and survive spent it all, while at the other extreme the payments were a windfall.
Source: Forbes – Money