Forget Swooshes and V’s. The Economy’s Future Is a Question Mark.
Forget Swooshes and V’s. The Economy’s Future Is a Question Mark.
WASHINGTON — There is widespread agreement that the United States economy will soon begin to recover from coronavirus lockdowns. The big debate is whether that rebound will resemble a V, a W, an L or a Nike Swoosh.
Increasingly, economists and analysts are penciling in another glyph: a question mark.
Forecasters often label their expectations for a post-recession rebound with letters — a “V” suggests a rapid recovery, a “W” a double-dip, and so on — but that’s hard to do this time around. As all 50 states begin to open up and consumers trickle out of their homes, the path ahead is wildly uncertain, making prognostication dicey.
Second-wave virus outbreaks, changes in consumer behavior or a wave of unexpected business closures could reshape the future. That has left economists unsure how quick or smooth a rebound the U.S. economy will undergo, prompting many to offer a range of scenarios instead of declarative forecasts.
It isn’t just Wall Street forecasters eschewing the alphabet in favor of a range of what-if’s. From the Federal Reserve to the White House, analysts have suggested that posing confident prognostications is probably more misleading than helpful. John C. Williams, president of the Federal Reserve Bank of New York, said during an appearance last week that it is important for policymakers to prepare for every eventuality, rather than focus on one type of recovery.
“We’ve had discussions all my career about V-shaped recoveries, L-shaped, U-shaped,” Mr. Williams said “One thing I’ve learned is, don’t get into that letter game.”
Larry Kudlow, director of the White House National Economic Council, said at an event sponsored by The Washington Post that he shares President Trump’s expectation for a rapid bounceback, but suggested that there are wide ranges around those estimates.
“It’s really hard to model a virus, or a pandemic, the likes of which we haven’t seen in 100 years,” Mr. Kudlow said.
“You can have your own Vs; there’s Vs, there are lesser Vs,” Mr. Kudlow said. “There are combos of Us and Vs.”
Cognizant of that uncertainty, the White House confirmed it will not even issue an update to its economic forecasts this summer, breaking decades of tradition.
Here are the possible shapes that economists are discussing and the caveats that have forecasters writing their predictions in pencil.
The Elusive “V”
Since economists know that economic activity slowed sharply during the first half of 2020, the best possible outcome is a swift recovery, making for a “V” shape in which the economy is back to its 2019 output level within a few quarters.
Unfortunately, economists say that projection is probably a pipe dream. In a note entitled “V Is for Very Unlikely,” Michael Feroli, J.P. Morgan’s chief U.S. economist, described the trajectory as one in which the economy “is turned off and then on, like a light switch.”
Because economic variables like unemployment and output often face a lingering drag after a one-time shock, that sort of outcome is pretty dubious, he said. Lower business capital spending and state and local budget cuts are likely to weigh on growth for some time, alongside other factors, making it hard for the economy to get right back on track.
It is also worth noting that a sharp rebound in growth rate is distinct from a return to the previous level of economic output. For example, the economy is broadly expected to show a fast rate of growth in the third quarter, given the record contraction in the second quarter. But overall output will remain lower than it was pre-coronavirus for some time, most economists think.
“The initial bounce may feel pretty robust,” said Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch. Her team recently revised up its third quarter growth forecast; they see a 7 percent output gain following a 40 percent plunge in the second quarter. While stimulus checks may help spending, that is not going to make up for corporate insolvency and lost jobs. Full recovery could take until the end of 2022, she said.
“There’s quite a lot of residual damage,” she said.
“L” is for Low Expectations
Just as only strident optimists expect a perfect “V,” only outright pessimists are projecting an L, in which growth remains at or near the very-low levels it almost certainly hit during the second quarter. The economy is already showing a partial rebound, suggesting that such a formation is unlikely.
Real-time trackers show a muted bounce, with a daily J.P. Morgan credit card series showing a slow but fairly steady uptick starting from mid-April. Google mobility data suggest that people are moving around more and visiting parks, TD Securities said in a research note. The pickup in areas that drive growth — retail, restaurants, and move theaters — has been more restrained.
“None of the states show a sudden snapback,” said Jim O’Sullivan, chief U.S. macro strategist at TD Securities, noting that some places are further along the path to official reopening. While the nascent recovery seems to preclude an “L,” he said, the limited data so far jibe with the idea that the recovery will be more gradual than the collapse.
“W” Depends on What’s Next
That brings us to a scenario that is still on the table: a W-shaped recovery. It could be that the economy will partly bounce back before plunging again amid a second wave of infections as states reopen and people face renewed exposure to the coronavirus, or if the disease stages a comeback this autumn.
While economists generally say that a “W” remains entirely possible, they aren’t willing to make it their most-likely forecast because it hinges on two total unknowns: whether there is another spike in infections, and whether states will shut down again if that happens. Analysts who venture a guess increasingly favor a nonletter shape as their base-case: the checkmark.
The “Check,” the “Swoosh” and the “Wave”
The Congressional Budget Office’s baseline expectation suggests that growth will contract slightly in the first quarter and sharply in the second quarter before making a gradual rebound starting in the quarter that stretches from the start of July to the end of September. The budget office doesn’t label the shape, because the climb back will be slower than the drop. The trajectory looks like a checkmark on a graph.
There are big uncertainties around that forecast. Additional waves of infection, variations in consumer behavior, and the timeline for a vaccine are all wild cards that could change the path ahead. A host of risks could lead to worse outcomes while a vaccine breakthrough or unexpected government support for the economy could improve the trajectory.
If a quicker recovery takes hold, the rebound could look more like a “swoosh” as growth improves slowly before accelerating. But if more infections occur and a vaccine remains elusive, the economy could also face a “wave” recovery of repeating peaks and troughs as states continually reopen and then pull back.
So which is most likely?
“We’re all prefacing what we say with: We’re not epidemiologists,” said Mr. O’Sullivan, explaining that the range of possible economic outcomes is unusually wide because it turns so much on what happens with public health. Because it’s a new coronavirus, and a totally unusual shock to the economy, nobody’s guess for what comes next is especially reliable.
Even the Fed’s economists, never shy to to set out a forecast, have sounded uncertain. Minutes from the central bank’s late-April meeting show that staff offered a baseline forecast in which shutdowns gradually ease and growth resumes into the second half of the year, but warned that “a more pessimistic projection was no less plausible than the baseline forecast.”
Fed policymakers, for their part, “discussed several alternative scenarios with regard to the behavior of economic activity in the medium term that all seemed about equally likely,” according to the minutes. Among them were predictions that the country experienced additional outbreaks and shutdowns (a “W” or a wave), and more optimistic situations in which social distancing measures were successfully relaxed (a check or a swoosh).
Richard Clarida, the Fed’s vice chairman, said last week that it could take until early autumn to get more clarity on where the economy is headed.
To put it bluntly, as Ian Shepherdson at Pantheon Macroeconomics did in a recent research note, “the timing of a full recovery is unknowable.”
Jim Tankersley contributed reporting.