To “V” or Not to “V.” Is this a V-Shaped Recovery?

During the early days of the COVID pandemic, the hope was for a V-shaped economic recovery. Remember those early days? Back then, I actually told a student that I thought they would go home for a few weeks, and then be back by April. Back then, I was a dumbass. Some things never change. Anyway, the idea was that the economy was good going into the pandemic, so unemployment would spike and then quickly return to normal. Some people even said that the recovery would be “better than a V…a rocket ship.” Has it been?

Of course, it’s weird to talk about a recovery when we are still neck deep in the Pandemic. But, the Federal-level stay at home guidelines expired on May 1, 2020, and many businesses started to reopen depending on the guidelines existing in their states. The hope was that the brief shutdown would: 1) limit the spread of the virus; while 2) allowing the economy to resume chugging along. Of course, we now know how miserably the federal government’s policies failed on the first point. But, on the second point things do look better. So, what has the recovery looked like, a V? To answer this question, I want to take two views — a big picture look at the whole economy and then a zoomed in look at vulnerable workers.

A V-Shaped Recovery? The Big Picture

To get a sense of the “V-ness” of the recovery, some context can help. What does the recovery following a recession usually look like? Therefore, the figure below compares the two most recent U.S. recessions: the Great Recession (grey line) and the COVID Recession (red line). The figure is centered around the peak unemployment rate in each recession, and looks at the 7 months before the peak and the 7 months after.

Figure 1. Comparison of Recovery from Peak Unemployment for Great and COVID-19 Recessions (Month and Year of Peak in Legend)

Now, you might be thinking, wait a second, isn’t that supposed to be the “peak” of the Great Recession? Isn’t it sort of flat? The peak of the Great Recession was in October 2009, at an unemployment rate of 10 percent. If it doesn’t look super “peaky,” it is because it took a really long time to get to the peak, and a long time to fall. Indeed, the unemployment rate didn’t even fall below 9 percent until October 2011 — two years after the peak!

By comparison, the COVID recession looks downright V-like. But, look a little closer. One can start to see a flattening at the end that makes it look less like a V and more like the classic Nike Swoosh. And this flattening — unemployment fell just 0.2 percentage points the last month — is concerning. It may simply reflect one discouraging data point. Or, it may reflect new damage to the economy being wrought from our failure to bring this virus under control in the first place. Only time will tell, but the figure below shows that there has been an uptick in the number of brand new unemployment claims, suggesting some backsliding.

Figure 2. Weekly Change in 4-Week Moving Average of Initial Unemployment Claims

Indeed, the last time initial claims increased by 5 percent from one week to the next was, you guessed it, during the Spring surge. So, although the economic recovery has definitely been “V-ish,” some clouds are on the horizon. Now let’s zoom in to look at how V-like the recovery has been for some vulnerable workers.

A V-Shaped Recovery? Looking at Vulnerable Workers

The COVID-19 Recession differed from the Great Recession in another way too. A few months ago, I made the point that the economic shock hit low-income workers harder than high-income ones, a pattern that did not exist in the Great Recession. But, if these low-income workers experienced a V-shaped recovery, things might not look so bad today.

So, the figure below traces out that recovery, starting in April 2020. The figure follows workers who were working in a given month in 2019, and sees what share of them were still working a year later, in the same month of 2020. In this graph, a complete recovery would be near 100 percent — nearly everyone working a year ago would be working today. The figure divides workers into groups based on their income. It shows workers in the bottom 20 percent of earners, the middle 20 percent, and the top 20 percent.

Figure 3. Share of Workers Working in 2019 who were Working in 2020, by Earnings Quintile

Source: Author’s calculations from CPS-IPUMS, University of Minnesota.

The figure shows that the lowest earners have seen the biggest recovery of any group. But, they still have a long way to go. 94 percent of high earners and 92 percent of middle earners working in October 2019 were working in 2020. For the lowest 20 percent of earners, that number was just 80 percent. And the pace of their recovery doesn’t exactly look like the upslope of a “V.” Instead, it has been inconsistent, picking up steam in the summer and slowing recently. A question for the future is whether the upward trend continues again, or slows as the winter surge takes hold. The initial unemployment claims above suggest the latter.

Watching out for the “W”

Right now, COVID is winning. While a vaccine is on the way, the U.S. still has to make it through a winter when people are likely to be hesitant to go out to stores and hang out in restaurants (and that completely ignores the devastating health consequences). The initial unemployment claims trending upwards is a troubling sign that we may be backsliding. Is the V-shaped recovery bound to turn into a “W”? Down again, and then up once we have a vaccine.

Only time will tell. But, while we can’t go back in time and shape a better response to COVID, we can pass policies to help businesses weather the storm until a vaccine stops the spread of COVID. To me, the two most important elements of such a package would be enhanced unemployment benefits and some kind of payments to businesses to maintain payroll. The evidence suggests that both policies work. Expanded unemployment insurance allowed people who lost their jobs to maintain spending. The effect of the Payroll Protection Program is somewhat more controversial. But, some high-quality (and admittedly preliminary) research has suggested it a substantial positive effect.

We may be heading into a dark winter. The U.S. has utterly failed in containing COVID. A health crisis this winter seems assured. But, an economic crisis doesn’t need to be. Can policymakers help maintain the recovery for another few months until a vaccine arrives? The possibility a V-shaped recovery depends on it.

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