Economists, including those in the Trump administration, fear that commerce will not enjoy the sharp, “V-shaped” recovery predicted by President Trump but will rather face a slow, bumpy one arrested by any further outbreaks — a “W-shaped” recovery.
“I expect more of a ‘W-shape’ recovery,” said Greg McBride, chief financial analyst at Bankrate, a personal finance website, “where we get a surge of activity as economies reopen and furloughed and laid-off employees start to get called back.”
A W-shaped recovery is likely, McBride said, because of the possibility of the economy having to be shut down again and economic activity rising and falling depending on the spread of the virus.
“I would say, though, we’re not going to get back to where we were quickly,” Federal Reserve Chairman Jerome Powell said in an interview with CBS on Sunday. “We won’t get back to where we were by the end of the year. That’s unlikely to happen.”
Trump economic adviser Kevin Hassett said Monday that a V-shaped recovery “might not happen. It could be the easy things to open [are] opened, and the harder thing to open are going to open slower.”
The Congressional Budget Office, Congress’s nonpartisan group of budget experts, projected Tuesday that the recovery would take time and would be gradual, looking more like a swoosh rather than a V-shaped recovery.
The economy could see potential spikes and drops in activity due to fluctuations in the virus and reticence on the part of consumers to engage in activities such as going to crowded bars or sporting events that entail a higher risk of transmission.
“Perhaps worse is a reopening of the economy that is followed by another shutdown due to a resurgence of the virus. Let’s hope we don’t go there because that will deepen the economic downturn and postpone the recovery,” McBride said.
Forecasters such as Carmen Reinhart and Kenneth Rogoff, two Harvard economists who are known for their research on the history of financial crises, expect that economic growth numbers will look very strong in the quarters ahead. Reinhart cautioned, however, during a recent Bloomberg interview that the apparent strength would be a statistical quirk due to the fact that the economy is currently devastated, so any growth will look “spectacularly great.” She added that the rosy numbers won’t actually result in the per capita income going back to what it was before in the coming months.
Instead, Reinhart said that if there’s a second wave of the virus, a W-shaped recovery was “a very real possibility” given past pandemics and the lack of a vaccine.
Powell has also cautioned that a full recovery may not be possible without a working vaccine.
Reinhart also said that the fact that many economies, including the U.S. economy, are heavily dependent on service industries, which are human contact intensive, is another reason she thinks a V-shape recovery is “dubious.”
“How do we know which retailers are going to come back? Which restaurants are going to come back? Cinemas? When this crisis began to morph from a medical problem into a financial crisis, then it was clear we were going to have more hysteresis, longer-lived effects,” Reinhart said.
Rogoff, who published This Time Is Different: Eight Centuries of Financial Folly with Reinhart in 2009, said that at best, the recovery would be U-shaped and added that he doesn’t know how long it could take to get back to 2019 per capita GDP.
“I would say, looking at it now, five years would seem like a good outcome out of this,” Rogoff said during the Bloomberg interview.
Employment is expected to be especially slow to bounce back.
McBride said that not all of the 36 million people who’ve become unemployed in the past eight weeks will get called back as the economy reopens. Instead, “there is the risk that even some of those called back aren’t needed if the demand isn’t there.”
He added that “elevated unemployment is going to be with us for years, not weeks or months.”
Thus far, the U.S. financial system has held up during the coronavirus shutdown. If the downturn lasts long enough, though, more homeowners could go underwater, and by default, more businesses could go bankrupt, and eventually, financial institutions such as banks could be in trouble too. Bankruptcy is on the rise across many industries, Reinhart said.
“Just as the hospitals can’t handle all the COVID-19 patients showing up in the same week, neither can our bankruptcy system and neither can the international financial institutions,” said Reinhart.
The stock market, another measure of economic activity, has bounced back significantly in the past few weeks after the shutdown panic at the end of March, but it’s still far from the record highs seen by the market in mid-February.
Powell has also warned that the nation’s unemployment rate could soar to as high as 25% during the worst of the coronavirus shutdown and that the lowest-paid people, those who earn less than $40,000, are being hurt the most by the downturn.
Many economic experts agree on one facet of the recovery, though: that it will be more painful the longer the economy is shut down.
“The economic risk is greater the longer that lockdowns or curtailed activity persist,” McBride said.
The longer the economy is shut down, the more difficult it will be for it to recover, said Jill Gonzalez, a financial analyst at WalletHub, a personal finance website. She added that the record high unemployment could also have long-term negative effects on the country’s GDP.
