If you have watched the news lately, you have probably heard economists discussing the possibility of a "V-Shaped Recovery" from the Coronavirus. A V-shaped recovery is a term that economists use to describe a situation in which the economy rapidly rebounds from an economic crisis. Obviously, a V-shaped recovery is desirable because it means that the economy will soon roar back to life and people will be able to get back to work. Although a V-shaped recovery is desirable, we don't get to pick what kind of recession we have, and I believe that several macroeconomic variables indicate that we will NOT have a V-shaped recovery.
First and foremost, any recovery depends on restoring stable, well paying jobs. Don't get me wrong, I love when my stocks go up, but the stock market is not a true measure of the economy. For the purposes of this analysis, I believe that it is much more important to consider the unemployment rate as this relates to people's livelihoods and their ability to earn an income and provide for their basic needs. While this sounds simple, there are quite a few prerequisites that must be fulfilled before we can even consider restoring the unemployment rate to pre-COVID levels. Fulfilling each of the prerequisites is a task in and of itself and will take considerable time. It is simple enough to say that "businesses need to open back up", but we need to look behind the scenes and see what is actually required for businesses to open up.
When I say "open back up", I mean fully open back up. If we want the same unemployment rate as before the virus, businesses will have to operate in the same manner as before the crisis. A business operating at 50% capacity under the "new normal" simply won't require as many employees as the same business did when it was operating at 100% capacity. From a health perspective, it may be necessary to operate at partial capacity to allow distancing, but from an economic perspective, it is simply nonsense to expect a business that is operating at a lower capacity to require as many employees as one operating at full capacity. Likewise, a business that shifts to primarily online ordering won't need as many employees. It is not just a question of when businesses recover, but if they return to operating in the same manner at all. If the virus causes a fundamental shift in the way businesses operate (which I believe to be true) it is quite likely that many workers will NOT be returning to their previous employment and will remain displaced until they can retrain or acquire new skills. All of this will take considerably more time than what is necessary for a "V-Shaped" recovery.
A Timeline Is Irrelevant
So, when will businesses open back up to full capacity? Unfortunately, I don't think there is a clear answer to this. Whether you want to blame it on political incompetence or the complexities of a constantly evolving virus, the simple fact of the matter is that we really don't know when it will be safe to open everything back up. Remember that the original lockdown was only supposed to be 15 days to "slow the spread", but turned into over a month and a half of stay at home orders. Was this necessary? Was this good? I'm not here to say; I merely want to point out that given how the virus has been handled so far, any kind of recovery timeline should be taken with a grain of salt. The entire hope of a "V-Shaped" recovery rests on the assumption that once everything reopens, businesses will be quick to rebound to full capacity, unemployment will drop, and the economy will hum right along. Unfortunately, this isn't likely to be the case.
For one, many states have not yet even reopened from the first round of lockdowns back in March, and the states that are reopening have seen spikes in cases. Those spikes in cases have caused governments to slow their reopening plans or put them on hold. Obviously, the longer we continue operating at partial lock down, the longer we will keep an elevated unemployment rate.
If you needed any more evidence that a recovery is a distant dream consider that many states aren't simply slowing their reopening; many states are currently reverting back to more restrictive lock downs. On 01 July, California issued an order that 19 counties had to close all indoor businesses for at least three weeks. Michigan re-closed indoor bar service and Texas closed bars and re-limited restaurant capacity. Pausing re openings would likely maintain the unemployment rate in an elevated state, but re-instituting the lockdowns risks increasing the unemployment rate even more. Again, I want to be clear that I am not saying this is or isn't good from a health perspective; I'm just pointing out the economic reality that without a fully open economy, we can't expect full employment.
The problem is that each time we try to open the economy back up, we see a spike in new COVID cases. As cases spike, government officials tend to scale back their plans to re-open the economy which brings more layoffs and shutdowns. If there is anything that businesses and investors hate, it is uncertainty. The "on again, off again" economy plays havoc with businesses and individuals alike. Individuals who have highly insecure jobs aren't likely to spend and stimulate the economy which will mean that even if we went back to full employment tomorrow, we wouldn't have a full recovery till those workers felt secure enough in their jobs to begin spending again and driving demand in the economy. Likewise, even if all business restrictions were lifted tomorrow, businesses would still be hesitant to make long term investments or hire employees because they could never be 100% sure that the government wouldn't re-lockdown their state.
But Don't Take My Word
I realize that I'm just a "Part Time" economist, so don't take my word for it. Check out the most recent Federal Reserve press release in which the US central bank clearly stated that the virus will weigh heavily on economic activity in the near term and pose considerable risks in the medium term. I want to point out how important the choice of language is. The Fed has traditionally "sanitized" its press releases to use words like a "cooling economy" instead of recession, but with this press release, they aren't hesitating to use words like heavily and considerable. The strong choice of language from the most powerful central bank should be a clear indication that there are still significant economic risks to the economy.
In my opinion, there is a long path to recovery, and there are several key events that will have to happen before a full recovery can even be considered. From my perspective, we simply can't have a recovery until we have full employment. In order to have full employment, business must be allowed to operate at full capacity. In order for businesses to run at full capacity there must be BOTH sufficient demand from consumers as well as a complete and total removal of all COVID restrictions. COVID restrictions won't be lifted until we see a dramatic decrease in new cases and/or a vaccine is deployed. There will obviously be a gap between each step that could last a few weeks to a few months.
All in all, I predict that it will take quite a while before the economy completely recovers from the economic impacts of the corona virus. Even once the economy is free from the virus itself, I believe that the virus will have fundamentally transformed the way that many businesses operate and will have accelerated the transition to a digital economy. There is also the question of debt. How will the government repay the debt that it created to stimulate business and give unemployment during COVID? Both of those questions will have far-reaching consequences for the future of business and unemployment, but that's a topic for another article. I'll end this article by saying that although we all hope for a speedy recovery, it is important to remain grounded in the facts. The simple fact is that there are many prerequisites (slow of new cases, vaccine, return of consumer confidence, end of restrictions) for the economy to resume its pre-crisis levels of employment and economic activity. None of those prerequisites have yet materialized, and there is no guaranteed timeline of when/if they will happen.