Despite all the dour data, the economy will bounce back once the lockdowns are eased.
The question will then become, what shape will the recovery take? Many analysts talk about how it will look like a letter. For instance, will it look like a “V,” a “U,” a “W,” an “L,” or a “reverse-J?”
What each of those shapes tries to convey is how fast the economy gets back to where it was before the shock of COVID-19 hit and the subsequent enormous contraction in economic growth. A short description of each is below:
V: A sharp and deep contraction followed immediately by an equally sharp recovery. This is the shortest duration event and the one that gets us back to where we were fastest.
U: A deep contraction followed by a longer period of depressed economic growth, followed by a rapid return to pre-crisis growth.
W: A steep drop-off, a short-term recovery, another steep drop, followed by a sharper recovery. The secondary drop is either caused by a reemergence of the virus or something occurring inside the economy.
L: A steep decline in growth followed by a period of low growth from which we really don’t recover for the foreseeable future.
Reverse-J: This is also known as a check mark or Nike Swoosh. This is a sharp drop followed by a prolonged, slow recovery that could take a few years.
Of course, the recovery could take another shape too. There is no consensus about the course the economy will take. And until we get a broader reopening, forecasts are largely conjecture. But each of these letters shows that the economy will decline a great deal. There is consensus on that part.
As the chart shows, the length of the Great Pause and the depth of the contraction in the second quarter and beyond will drive what letter the recovery takes on. A “V” would be best and is what we are all hoping for.
–Curtis Dubay, Senior Economist, U.S. Chamber of Commerce