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- Economists say the US economy is either entering a recession or already in one, but the way it rebounds could take several forms.
- Experts have turned to the alphabet to describe how GDP, company profits, and stock prices could return to higher levels or stay mired in virus-induced lows.
- A V- or U-shaped recovery relies on effective containment of the outbreak and ample stimulus from the government and the Federal Reserve, Seema Shah, chief strategist at Principal Global Investors, said.
- A W-shaped trend would usher in bumpy, two-staged resurgence, Jack Janasiewicz, portfolio strategist at Natixis Investment Managers Solutions, said.
- An L- or I-shaped downturn projects a grimmer future, as economic activity fails to rebound and endures continuous shocks from a lasting coronavirus pandemic, he added.
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For a slump driven by supply chain disruptions, corporate credit scares, and a shock to consumer demand, a trend to recovery could look as simple as ABC.
Analysts following the coronavirus pandemic have frequently turned to the alphabet when describing how they see the US economy bouncing back from a likely recession. Projections for S&P 500 earnings per share, gross domestic product growth, and broad stock indices have taken the shape of letters from L to W.
Exactly which letter an uptrend may look like depends on a few variables. Central banks around the world have unleashed trillions of dollars in stimulus to stabilize economies and keep citizens afloat.
Yet jobless claims and infection rates are the metrics to watch for when global growth may return to past highs, Seema Shah, chief strategist at Principal Global Investors, said in an interview with Markets Insider. A full economic rebound can’t arrive until the virus threat subsides, she added, and the level of job loss will signal the degree of economic shock.
A V-shaped recovery is the most optimistic forecast, as it calls for a sharp rebound after bottoming out for a short period. Demand lost during the nationwide shutdown would simply be deferred to a later date and add to the regular pace of activity seen before the outbreak. A recession would last only a few quarters before rapid growth brought the economy back to previous levels by the end of the year.
Even if it paints a rosy picture of economic resurgence, the hopeful trendline doesn’t account for a downturn’s lasting effects, Shah said. Such simplifications can be misleading in how they depict recession as an event that does little harm if it lasts only a few weeks. Everyday Americans will struggle through a relatively quick slump as financial conditions tighten and defaults rise, she added.
“Even if we have a V-shaped recovery, it’s still going to feel like a recession is going on,” Shah said. “Government policy can do a lot, but inevitably it’s not magical. There will be some bankruptcies and some people will be laid off.”
The latter has already begun. Jobless claims spiked over the week ended March 21, soaring to a record 3.3 million as temporarily closed businesses lay off workers. Economists anticipated an increase to only 1.5 million, suggesting the virus’s economic toll will hit harder than past plunges.
Prolonging the downturn
Should an economic trough last longer, GDP data could form a more U-shaped trend through 2020. Supply chains would restart in a “reasonable” time period and infection rates would follow the precedent set by past pandemics, Jack Janasiewicz, portfolio strategist and manager at Natixis Investment Managers Solutions, said.
A “timely, sizable, and correctly targeted fiscal package” could decide whether a recovery takes a V-shape or a U-shape, Shah wrote in a LinkedIn post on Thursday.
In a grimmer scenario, economies could trend in a W-shape if the virus resurfaces. Quarantines in some areas prove successful in curbing infection, but areas with relaxed responses could drive a second spike in cases, Janasiewicz said. The economic shock would repeat itself before harsher containment measures stabilize the nation.
Daily data from movie theaters and transit systems are effective ways to track a premature return to regular activity, he added.
The worst-case scenarios
L- and I-shaped trends mark Natixis’ bleakest outlooks. The former calls for a prolonged period of stifled economic activity sourced from a “limit of monetary policy kicking in” and the virus becoming a recurring health crisis, Janasiewicz said. Demand shocks and weak consumer confidence would weigh on any hopes of recovery, and classic policy playbooks would be “too reactive, too small, and too slow,” according to Natixis.
If companies can’t adjust quickly enough to a new and bleak economic norm, an I-shaped trend develops. The collapse of credit markets would form a “cascading negative shock” through global markets, driving historic levels of defaults, Natixis said. The coronavirus would overwhelm global health systems, spiking fatality rates and forcing several months of deep economic recession with little sense of stability.
Analysts aren’t yet calling for the last two events. Janasiewicz sees a U-shaped bounce arriving, as a V-shaped recovery “is a very low probability” after the outbreak’s latest developments.
A V-shaped rebound may still arrive in the wake of the federal government’s $2 trillion stimulus bill, Shah wrote, adding that a U-shaped trend would be more likely if the outbreak drives credit crises for small and medium-sized businesses.
Economic data reflecting the entirety of coronavirus’s economic outlook is months away, but a U-shaped recovery is still in the cards “as long as the market can see an end in sight,” she added.
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