Last week I discussed the difference between the Great Recession we saw in 2008 and 2009 versus the current pandemic induced recession or Coronavirus Recession. In short, our economy relies heavily on household consumption for state prosperity and despite a historic stimulus package in both spending and depth, unemployment remains at the highest percentage, post-Great Depression. This article will go over several likely scenarios and arguments that economists, government officials, and people from established non-bias organizations have made.
V-Shaped Likelihood: Less likely
In a v-shaped recovery, the economy falls quickly before seeing a sharp reversal. In order for this to happen, life would seemingly return back to normal by the end of this year. This was viewed as the likely scenario, but after historic action by the federal reserve and over 30 million unemployed in the last 6 weeks the likelihood of this happening is becoming thin. Restrictions and consumer confidence support the idea that even after this is done it will take awhile to readjust.
W-Shaped Likelihood: Less likely, but possible
A scenario like this would be a recovery followed by another downturn, then another recovery. This is possible if restrictions and guidelines are loosened too soon and another wave of the coronavirus hits or cases surge. With states opening back up, people could potentially infect others and cause a lapse in coronavirus cases. If cases surge we could easily be back to restrictions and more closures.
U-Shaped Likelihood: Probable
This is similar to a v-shape with the exception being that the turnaround is less defined. GDP and economic output shrinks for several quarters before a slow return to normalcy. Some economists are hopeful that we can see a return to normalcy in the economy by the end 2021. Vaccines and drugs to combat coronavirus will help speed up the economy, but this has already been done and people will remain on alert.
L-Shaped Likelihood: 50/50
When the economy comes crashing down and it takes a few years to recover. This is usually a depression where there are multiple quarters of negative or very little growth. The fact is some business won’t come back and others will learn how to do more with less. We are also seeing a broken supply chain that is crippled by a lack of demand. That means those industries have lost millions and potentially billions of dollars.
In my opinion: Jobs just won’t bounce back and it’s unrealistic to think that they will. How can jobs simply come back when some businesses are going to be closed for good? Small businesses are especially vulnerable to closures because they do not have a financial backstop. According to a survey by Main Street America, 7.5 million small businesses are endangered of closing in the coming months, as 40% of those correspondences only have 2 months worth of savings or less.
Realistically, once those businesses close a new business will have to take its place, build up enough of a demand before it even considers hiring more people. Keep in mind consumer confidence has fallen sharply over the past several months, so rising demand will not happen overnight.
While I am hopeful that things will get back to ‘normal’, my fear is that it could take years versus weeks or months (V-shape). The last recession impacted hiring, wages and opportunities for everyone; including the housing market. Homeownership sank from highs of 69% in 2006 to a 20 year low in 2016 (63.7%). While it has since risen to 65% at the end of 2019, that number matches home ownership percentages of the mid-90s.
If you are in good financial shape and can afford to hold on to your house over the next 5 years, it likely makes sense to hold on to your assets to hedge against the likeliness of short term deflation and long term inflation. However, if you are looking to get out of a tough situation, looking to protect the equity you’ve built or save yourself from economic uncertainty, then we can help. Please drop us your information if you’d like to know more about how we can assist you or want a deeper understanding of how the changing economic environment will impact you.
Stay Tuned: Next week I will discuss the financial ramifications of the record stimulus and what it means for inflation and deflation