No Single Story to the COVID Recovery

Followers of baseball statistics will recognize K as the abbreviation for a strikeout. For the pitcher, a strikeout is cause for celebration; for the batter, a defeat. Baseball season is over, but the American economy is seeing a lot of Ks: while some are celebrating, others feel defeated.

After the COVID economic crash, much speculation centered on the shape of the recovery to come. Various letters were used to trace the prospective course of gross domestic product (GDP). Optimists hoped for a V-shaped pattern that would see activity rebound as quickly as it declined. Pessimists feared an U-shaped progression in which the economy would be depressed for a long period. Ultimately, it appears we will have some hybrid between the two, forming a strange square root shape.

But all of these depictions of overall performance mask what is going on below the surface. In reality, we are seeing deeply divergent outcomes across society, which together paint a picture of a two-tiered, K-shaped recovery.

Those on the upward trajectory of the K are having a year marked by altered routines, but good economic fortune. Knowledge workers who can do their jobs remotely have settled in reasonably well. Social gatherings and travel plans have been disrupted, and households with children have been put to the test. But for this first group, prosperity remains in place.

Those more fortunate have put some of their disposable income to work by investing in their homes or purchasing new ones, driving strength in the housing market despite the recession. They have the means to make down payments and take advantage of low mortgage rates. Families in this category are more likely to own stocks, and have enjoyed the substantial gains produced by equity markets over the last six months.

Weekly Economic Commentary - Chart 1 - 11/25/20

Contrast this with the experience of workers in basic service industries and small businesses. Job losses during the wave of shutdowns have been widespread and indiscriminate. Additional unemployment support for U.S. workers was generous but short-lived. Those who continued working were often essential workers who risked viral exposure to earn a living. And the path downward has not yet reached its bottom: programs like U.S. eviction and foreclosure moratoria and special unemployment benefits will expire in the months ahead.

Those on the lower leg of the K have not benefitted from strong financial markets. The Federal Reserve’s triennial Survey of Consumer Finances (SCF) found that more than a third of working-age families in the U.S. did not participate in a retirement plan, and less than a third of lower-income families owned any equities. Those in the lower half of the American wealth spectrum have almost no net worth, and no savings to buffer against economic disruption.

“There is no single story of economic recovery from COVID-19”