Earlier this year, many economists and market analysts were
predicting an apocalyptic financial downturn that would potentially rattle the
U.S. economy for years to come. They immediately started to compare it to the
Great Depression of a century ago. Six months later, the economy is still
trying to stabilize, but it is evident that the country will not face the total
devastation projected by some. As we continue to battle the pandemic, forecasts
are now being revised upward. The Wall Street Journal (WSJ) just reported:
“The U.S. economy and labor market are recovering from
the coronavirus-related downturn more quickly than previously expected,
economists said in a monthly survey.
Business and academic economists polled by The Wall Street
Journal expect gross domestic product to increase at an annualized rate of
23.9% in the third quarter. That is up sharply from an expectation of an 18.3%
growth rate in the previous survey.”
What Shape Will the Recovery Take?
Economists have historically cast economic recoveries in the
form of one of four letters – V, U, W, or L.
A V-shaped recovery is all about the speed of the
recovery. This quick recovery is treated as the best-case scenario for any
economy that enters a recession. NOTE: Economists are now also using a new term
for this type of recovery called the “Nike Swoosh.” It is a form of the V-shape
that may take several months to recover, thus resembling the Nike Swoosh logo.
A U-shaped recovery is when the economy experiences a
sharp fall into a recession, like the V-shaped scenario. In this case, however,
the economy remains depressed for a longer period of time, possibly several
years, before growth starts to pick back up again.
A W-shaped recovery can look like an economy is
undergoing a V-shaped recovery until it plunges into a second, often smaller,
contraction before fully recovering to pre-recession levels.
An L-shaped recovery is seen as the worst-case
scenario. Although the economy returns to growth, it is at a much lower base
than pre-recession levels, which means it takes significantly longer to fully
Many experts predicted that this would be a dreaded L-shaped
recovery, like the 2008 recession that followed the housing market collapse.
Fortunately, that does not seem to be the case.
The same WSJ survey mentioned above asked the economists
which letter this recovery will most resemble. Here are the results:
What About the Unemployment Numbers?
It’s difficult to speak positively about a jobs report that
shows millions of Americans are still out of work. However, when we compare it
to many forecasts from earlier this year, the numbers are much better than most
experts expected. There was talk of numbers that would rival the Great
Depression when the nation suffered through four consecutive years of
unemployment over 20%.
The first report after the 2020 shutdown did show a 14.7%
unemployment rate, but much to the surprise of many analysts, the rate has
decreased each of the last three months and is now in the single digits (8.4%).
Economist Jason Furman, Professor at Harvard University‘s
John F. Kennedy School of Government and the Chair of the Council of Economic
Advisers during the previous administration, recently put it into context:
“An unemployment rate of 8.4% is much lower than most
anyone would have thought it a few months ago. It is still a bad recession but
not a historically unprecedented event or one we need to go back to the Great
Depression for comparison.”
The economists surveyed by the WSJ also forecasted
unemployment rates going forward:
The following table shows how the current employment
situation compares to other major disruptions in our economy:
The economic recovery still has a long way to go. So far, we
are doing much better than most thought would be possible.