Forget Swooshes and V’s. The Economy’s Future Is a Question Mark.

Here are the possible shapes that economists are discussing and the caveats that have forecasters writing their predictions in pencil.

The Elusive “V”

Since economists know that economic activity slowed sharply during the first half of 2020, the best possible outcome is a swift recovery, making for a “V” shape in which the economy is back to its 2019 output level within a few quarters.

Unfortunately, economists say that projection is probably a pipe dream. In a note entitled “V Is for Very Unlikely,” Michael Feroli, J.P. Morgan’s chief U.S. economist, described the trajectory as one in which the economy “is turned off and then on, like a light switch.”

Because economic variables like unemployment and output often face a lingering drag after a one-time shock, that sort of outcome is pretty dubious, he said. Lower business capital spending and state and local budget cuts are likely to weigh on growth for some time, alongside other factors, making it hard for the economy to get right back on track.

It is also worth noting that a sharp rebound in growth rate is distinct from a return to the previous level of economic output. For example, the economy is broadly expected to show a fast rate of growth in the third quarter, given the record contraction in the second quarter. But overall output will remain lower than it was pre-coronavirus for some time, most economists think.

“The initial bounce may feel pretty robust,” said Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch. Her team recently revised up its third quarter growth forecast; they see a 7 percent output gain following a 40 percent plunge in the second quarter. While stimulus checks may help spending, that is not going to make up for corporate insolvency and lost jobs. Full recovery could take until the end of 2022, she said.

“There’s quite a lot of residual damage,” she said.

“L” is for Low Expectations

Just as only strident optimists expect a perfect “V,” only outright pessimists are projecting an L, in which growth remains at or near the very-low levels it almost certainly hit during the second quarter. The economy is already showing a partial rebound, suggesting that such a formation is unlikely.

Article source: https://www.nytimes.com/2020/05/29/business/economy/economy-recovery-forecast-coronavirus.html