In response to the COVID-19 pandemic, the United States and some economies throughout the world were forced into a self-inflicted shutdown in order to protect public health.
As businesses in the U.S. paused operations, employees were let go and unemployment rose to nearly 15% as of May 2020, the highest since the Great Depression. More than 40 million jobless claims were filed, and economic predictions as of June 2020 indicate a slow recovery with high unemployment that will extend at least well into 2021. Analysts expected gross domestic product (GDP) to drop another 8.5% to 11% in the second quarter of 2020.
What Is an Economic Recovery?
At some point, the economy will work its way through the recession. That may come about because of the temporary nature of some job losses, government stimulus actions, or a quicker-than-expected arrival of a COVID-19 vaccine.
An economic recovery following a recession is the economy healing itself from the damage done. It is characterized by improving business activity with signals that include growth of Gross Domestic Product (GDP), rising incomes and rising employment.
Under the hood of the economic engine, a recovery appears as the reallocation of resources, including investment and workers, from failed enterprises to those that can better use the same resources. Another analogy is that of a healing body breaking down and reusing dead and damaged tissue. Once this recovery process is complete, the economy enters into a business cycle phase of expansion.
The Shapes of Recoveries
Economists track GDP in graphs to see whether we are on a trajectory toward a Z-, V-, U-, W-, L- or even a Nike swoosh-shaped recovery.
If pent-up demand for products and services is immediately released following the back-to-work status of many of those temporarily unemployed, we could see a sharp recovery, characterized by the Z or V shapes. In the Z formation, the economy rebounds so strongly, that it is more robust than before the drop into a recession. In a V formation, it snaps back to pre-recession levels.
U and W formations show prolonged dips or double-dips into recession territory. The worst formation, the L, shows a permanent or long-lasting effect from the recession’s catalysts, which was what the recovery from the Great Depression looked like.
In a Nike swoosh-shaped recovery, the bottoming out may take longer, but the rebound will be gradual and steady.
Catalysts for Recovery
Recession and expansion cycles are an inevitable, if not necessary, occurrence in any first-world economy. Here are two possibilities for spurring a recovery via a variety of catalysts:
- A Green Recovery: Politicians in the United States and around the world have been discussing less reliance on fossil fuels and a transition to a net-zero emission future. If not enough impetus was behind this movement prior to COVID-19, with uncontrolled deforestation, unsustainable agricultural and fishing practices, and ozone contamination, now governments are beginning to respond.The EU is calling for $22 billion in investments over the next decade and several bills have been proposed in Congress that would increase U.S. funding. Effective green initiatives could bring sustainable sources of energy, farming and even transportation that could be marketed around the world and be a boon to the investing economies.
- Government Stimulus: The federal response to COVID-19 was to provide a stimulus package with relief for shut-down businesses and out-of-work employees. While it is too early to gauge the impact of these measures, it is clear that many businesses and individuals have been able to survive the shutdown because of these funds.On the state level, Indiana is allocating $44 million to support and resources for small businesses, manufacturers and entrepreneurs to help the economy get back on track. The state is also deploying federal relief funds under the CARES act in ways that are aimed at long-term economic stabilization. Funds are going to the Small Business Restart Fund and Small Business Relief & Planning Resources, among others. This demonstrates a commitment to small business, the primary driver of employment in the state, and across the country.
- Fiscal and Monetary Policy Actions: The Fed has a number of tools and policymaking strategies that can stimulate consumer demand, ease interest rates to encourage lending, and prop up threatened and vital industries and financial institutions. Industry bailouts and the lowering of prime rates are examples. Such policies have complex considerations, with many factors that determine their impact on the healing process.
The lagging indicator that most citizens would like to see as soon as possible — a return to previous healthy employment levels — is unlikely to occur until a recovery is well underway. When the economy does recover — whether that occurs in 2020, 2021 or a few years down the road, we will see leading indicators like rising stock prices that portend better times ahead.
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