The U.S. economy’s descent into a crisis certainly looks like a straight line down. What shape the recovery might take on the way up is an entirely different story.
As economists try to make sense of what a recovery might look like, the only real certainties have been an unpredictable virus, dismaying data, and massive (yet improving) unemployment numbers in the near term.
While unemployment modestly ticked down to 13.3% in May, it skyrocketed in April, hitting 14.7% (and many suspect it was even higher), as over 42.6 million Americans have filed for unemployment since shutdowns began. GDP for the first quarter shrank by 4.8%, with what Wall Street uniformly touts will likely be the worst quarter—the second—still to come. That has led to economists and analysts predicting a much wider variety of lettered and shaped recoveries than we have typically seen in past recessions.
The V crowd
But as the economy begins to reopen (and equity markets have bounced nearly 40% off their March lows), some firms like Morgan Stanley and Credit Suisse in recent weeks still see a V-shaped recovery in the economy or market as a possibility. For one, Michael Wilson, chief U.S. equity strategist at Morgan Stanley, wrote in May, “We will see a V-shaped recovery for two reasons—the historic steepness of the decline in activity, and the unprecedented policy response.” And Goldman Sachs economists wrote in a May note that “we have more confidence that a large amount of activity will return fairly quickly” as the economy reopens.
While much of the fundamental economic data isn’t too encouraging yet, those like Mohamed El-Erian, chief economic adviser at Allianz, point to what he calls “high high frequency data” for optimism, like Google mobility data to show how people are getting out and shopping as reopenings take place, while other economists like Moody’s Analytics chief economist Mark Zandi are watching early data like OpenTable reservations for restaurants and ADP data for signs of growth in the economy.
For one, Brett Ryan, senior U.S. economist at Deutsche Bank, is betting all the data in the next three months will improve. “That initial bounce is the easy part. It’s when you get six months out, what does the pace of recovery look like then?” he asks. “While everybody is cheering the stock market right now, and we’re watching the mobility data and saying, ‘Wow, things are starting to bounce back, states are starting to open up and confidence is coming back a little bit,’ let’s not take a victory lap just yet.”
Despite the recent reopening optimism, the only way we’ll actually see a true V-shaped recovery, some economists say, is if there is a widely distributed and effective vaccine or treatment available—a scenario that’s unlikely to happen anytime soon.
Square root symbols, U-shapes, check marks, and pendulums
Key to gauging how quickly the economy might recover is the pace at which employment bounces back, and whether a second wave of the virus hits, economists say.
UBS Global Wealth Management senior economist Brian Rose says the firm is anticipating a U-shaped recovery, not a V. “The good news [is] that we are starting to grow again. The bad news is that we’re starting from an awfully deep hole” that will take a long time to recover from, Rose tells Fortune. That growth may look like some of the strongest growth we’ve had in a while, he argues, but “when you’re starting from this deep down, even that doesn’t get you all the way back to where you were.”
A rapid return to work is key, Rose suggests, but it’s likely going to take a long time for people to get their jobs back, especially as some businesses may disappear during the crisis. Meanwhile, even as restrictions lift, people will still worry about catching the virus until there’s a vaccine. “That’s going to put a limit on the economy,” Rose says.
Deutsche’s Ryan, on the other hand, prefers a more unusual shape: the square root symbol recovery. “A reversed square root symbol whereby the tail is below the start and gradually upward sloping,” he describes. It seems we’ve hit an inflection point at last, but the GDP contraction in the first and second quarters is going to be massive, and it will take several years for output to recover, he suggests. In fact, Deutsche Bank is estimating the unemployment rate likely won’t drop to pre-pandemic levels of around 4% until 2023, says Ryan.
One bright spot? The massive (and quick) fiscal and monetary response from the government. But while that “forceful response right off the bat in this crisis sets you up to have a more robust rebound as we come out the other side of this, it’s still going to take time,” Ryan suggests. And if the biggest threat of all (the reemergence of the virus causing a second shutdown) hits, there’s going to need to be more stimulus to bridge a second liquidity gap—something that might be more challenging to pass quickly as the election approaches, he says.
Whether that recovery looks more like a sharp square root symbol or not, “at the end of the day, it’s about job creation and bringing people back to work as quickly as possible. That is really going to determine the pace of this recovery,” Ryan tells Fortune.
Others like Moody’s Zandi are more blunt: “A V-shaped recovery is out of the question. That’s not happening,” he says, as the virus is doing “meaningful structural damage to the economy.” Instead, he’s seeing a Nike swoosh shape, or a check mark. As businesses ramp up in the coming months, it might feel like a V-shaped recovery, he says, “but on the other side of the reopenings, the economy is going to go sideways until we get a vaccine or therapy that’s widely distributed and adopted.”
While the economy has “turned the corner,” Zandi predicts employment won’t fully recover until mid-decade. If a significant second wave of the virus hits, Zandi believes that could be “fodder for a depression” in the economy’s current fragile state. But even without a second wave, new fiscal rescue stimulus will be important to staving off a second recession, he says. And as we start to see bankruptcies, defaults, and foreclosures, how big that wave is will “determine a lot about the shape of the recovery,” Zandi argues. But barring a second wave and the failure of policymakers to put another fiscal package together, Zandi thinks we’ll “avoid going back into a recession.” In the meantime, we’ll see job growth in the next few months, and there will be “fits and starts” of recovery, he says.
That’s more along the lines of how Allianz’s El-Erian sees recovery. He thinks of it more as a check mark or a pendulum: Things started out in a normal state, then “violently swung” to the lockdown stage. “We are trying to find a middle way, and we’re not going to get there immediately. We’re going to oscillate around some midway of these two things,” he suggests. The good news is that the reopening thus far hasn’t resulted in massive spikes in infection, he says. But the challenge is we’re also seeing “there are difficulties in reopening when it comes to consumer engagement and operational issues on the business side,” El-Erian notes, as concerns around health will be central in people’s willingness to engage. While the progress of the reopening thus far is encouraging, “it’s early days,” he says.
But playing the letters game or not, economists like Zandi encourage caution: “The metaphor is a hurricane: You get nailed by the hurricane. You go into the eye, [and] if you don’t have radar, you think, ‘Oh, I’m okay, the worst is over. I survived. A lot of damage, but I can rebuild.’ But if you have radar, you know there’s the other side of the hurricane coming. Maybe not as powerful as the original, but maybe it is,” he says. “We don’t know.”
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