(upbeat music)
- [Announcer] If you watch the news, you've probably been
hearing about alphabet economics.
- V shape. - That V shape.
- The W shape.
- The U shape or the dreaded L shape.
- [Announcer] This is how economists talk
about economic recoveries.
And it's not just jargon.
These letters drive policy decisions at Congress
and the central bank, decisions that can help determine
how far we fall and how quickly we rebound.
But the Coronavirus downturn is different
from past recessions.
In fact, it's so different that economists are having to
come up with new shapes to describe the potential recovery.
When economists study a rebound, they often look back at
previous recoveries for insight.
Here's a look at change in the US' gross domestic product
over the past century.
You can see, these letters appear in different places
on the chart.
Look at 1953.
In the midst of an economic boom, the Fed raised
interest rates to prevent inflation and the economy saw
a sharp contraction followed by a quick recovery in 1954.
This is the V.
- V is preferable.
What it means is that right after you have the downturn,
you bounce right back.
In a V shaped recovery, we would get back to the previous
high of GDP and the previous low of unemployment
within a matter of months instead of a matter of years.
- [Announcer] Experts say it's possible that we could see
a V shaped recovery from the current recession.
- The early signs that we got in May, suggested we were
bouncing back from a very deep hole.
There's a chance people just come back
and try to get back to business.
Some of our income has been replaced by the government,
by government paychecks, and so that could come right back
but it's not a certainty.
- [Announcer] Jump ahead to the early 1980s when the Fed
pushed interest rates higher to battle inflation.
The GDP dipped down in 1980, spiked back up, and then
plummeted even further before recovering at the end of 1982.
You can see this formed a W shaped recovery.
- The Fed was pushing up interest rates to get inflation
down but it didn't work, they had to go back at it.
And it wasn't really until the end of 1982 when the Fed was
in a position where it could cut interest rates aggressively
and get the economy back on track again.
The Fed is in a different position this time, because
they've cut interest rates very aggressively already.
There's no inflation on the horizon.
- [Announcer] If we see a W this time, it will likely be for
different reasons tied to the Coronavirus
- If the second wave comes in and people stop going out
and factories have to shut down again and governments start
putting on more restrictions that could stall the expansion
that we started to see in May and June.
- [Announcer] But there are other options too.
Look at 2009, at the period following
the last financial crisis.
The economy declined steeply when the housing bubble burst
and took nearly two years to recover.
This is known as a U shaped recovery.
- What could cause a U shaped recovery this time
is you have to come back to the Coronavirus.
If we continue to see high case loads
and high hospitalization rates, it might be that people are
very slow to get back to business normally and then we just
don't climb out of this very quickly.
- [Announcer] So those are the traditional shapes of
alphabet economics.
But again, this downturn is different and economists are
looking at other shapes to try to describe it.
- Our economy got hit by an outside shock, the Coronavirus,
and we just shut it down.
It was almost like a meteorite hit the economy.
- [Announcer] One of these shapes is the swoosh,
where the economy falls quickly rebounds a little,
but then takes months or even years to recover fully.
- I think what would cause a swoosh like expansion is that
all of the uncertainty that comes out
of what we just experienced.
The way people think about for instance,
do I wanna live in a city anymore?
The way a business about do I want to invest in an urban
area or someplace where it might be safer
and not as congregated?
That it takes years potentially for people to get back into
our comfort zone where the economy is functioning
at its full capacity.
- [Announcer] And it may take even longer than that.
Some economists say this recovery could look more like
a reverse square root sign, where it drops and then rebounds
partially before flatlining for a prolonged period of time.
If you look at the economic activity index from earlier
this year, you can kind of see it.
It dropped sharply in March and rebounded partially
before appearing to start to flatten out.
But it's too soon to say if it will flatline
- I would say a reverse square root sign would mean
in the early stages of the recovery, a quick bounce back
and we have seen that in May and June.
But then as it proceeds, it flattens out.
So we don't get all the way back to where we were
because business isn't a household come out of this
less willing to spend and invest because
the Coronavirus doesn't go away.
- [Announcer] The path of a recovery isn't just
an abstract shape.
It helps policymakers determine how much stimulus money
to pump into the economy.
- If the Fed was confident that we were gonna have
a V shaped recovery, then they would start raising
interest rates sooner than they otherwise would.
They would stop doing their bond buying programs
sooner than the otherwise would.
If they think it's gonna be a long and slow and drawn out
recovery that holds down inflation, then they're gonna keep
interest rates really low for a longer period of time.
It's fundamentally important because if the Fed is
determined to hold down interest rates 'cause it thinks it's
gonna be a slow recovery, then that will hold down
the rate that you pay on your mortgage,
that'll hold down the rate that you pay for a car loan.
- [Announcer] To protect millions of unemployed Americans,
the Fed has signaled plans to keep interest rates
close to zero through 2022.
- The worst casualty, economically, in a recession
is the person who loses his or her job.
So this affects everyone who's out of work and wants to get
back on the factory floor, wants to get back into the
restaurant, wants to get back in the office.
- [Announcer] Congress's decision about whether to approve
more economic relief for these workers
will depend on the shape of the recovery.
And as the Coronavirus cases rise across the country,
that shape remains uncertain.
(upbeat music)