(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Some of our income has been
replaced by the government,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)
