COVID-19 resurgence has economists reevaluating shape of US recovery

Posted at 2:04 PM, Jul 08, 2020

When experts look at the economy and its rebound, they go through an alphabet soup of letters, with a “V” shape recovery being the best-case scenario. It’s a fast decline with a fast recovery. Letters like “W” or “L” mean a much slower and painful path forward.

A resurgence of more COVID-19 cases is shifting the likely shape of our economic recovery, and having economists evaluate the likelihood of a recovery in the shape of the more dreaded letters.

“The fact that the virus has increased in a number of states shows that it is still very much a threat not only to one’s health but the economy,” said Michelle Meyer, who heads U.S. Economics at Bank of America. “The initial stage of the recovery was quite robust. It felt quite ‘V’ like, the economy was digging its way out of what was a very deep hole.”

According to Bank of America, about a third of the jobs lost during the pandemic have been recovered. However, the recovery has slowed down into more of a “U” shape, and now data is showing a stall with concern of a higher chance of a “W” or “L” shape recovery.

“The ‘W’ trajectory would be the worst-case scenario. That would show real fragility on the economy if we dipped back into a recession,” added Meyer.

Experts say it would lead even higher unemployment, and more permanent job loss and business closures. In addition, to come out of a “W” or “L” shape recovery, we would need even more stimulus money from the federal government, which may not even improve the economic downturn as much as it did the first time.

“Stimulus in Washington provides a really nice band-aid and I think it helped tremendously in the first stage of this recovery but at the end of the day, we need the economy to fundamentally improve,” said Meyer.

The good news is unless there is a significant or full shutdown again, a “W” shape recovery is still less likely to occur than a “U” shape.

“Our analysis projects that a 'U' shape recovery with rather steep losses and growth this year and rather flat next year and then recovering subsequently is the most likely outcome,” said David Turkington, the Senior Vice President at State Street Associates.

A recent State Street study based on 100 years of historical data shows that the U.S. still has 30.1% chance of a “U” recovery, and a combined 24.4% chance of a “W” or “L” shape recovery which include stagflation and depression outcomes.

“The real economy I think is what determines the recovery and how that plays forward,” said Turkington.

The real economy is jobs, businesses and consumer spending. Providing stability there could determine which way the economy goes.