There’s much debate among economists about the likely path of our country’s recovery from the pandemic-fueled recesssion. Those who think about such things tend to talk in terms of “shapes.” So, in a series of surveys among quantitative macroeconomic economists at some of the top universities throughout the country, that’s how the polling and news analysis web site FiveThirtyEight has been framing its questions.
In the most recent survey, conducted among 34 economists from June 19 to 22, the “reverse radical” was the favored shape, chosen by 73% of the forecasters. No, that doesn’t refer to one of Michael Jordan’s patented moves to the basket. Think of it as a reverse square root sign, depicting a sharp decline, followed by a sharp partial rebound, and then a slow recovery.
A Nike swoosh-shaped recovery (sharp decline, slow recovery) is the second-favorite bet, with 15% of economists casting their ballots there. That’s followed by a U-shaped recovery (9%), which is marked by an extended period between decline and recovery. Some 3% believe the economy will take a dreaded W-shaped path toward recovery, with sharp, repeated ups and downs. None of the economists in the most recent survey said they foresee a V-shaped recovery (sharp decline, quick recovery).
While economists in other surveys envision the recovery taking still different shapes — from an L (the worst possible outcome, where a steep decline is followed by a slow, years-long recovery) to a check mark (a slight variation on the swoosh) — clearly the most honest shape is a question mark because no one really knows what the future holds.
When it comes to predictions, economists don’t exactly have the best track record. (Read 100% of Economists: Dead Wrong.) And just to pile on a bit, when FiveThirtyEight surveyed its economists just a month ago, they had very different opinions, with most anticipating a swoosh-shaped recovery. The now-favored reverse radical was a mere footnote, grouped with a two-step recovery (a sharp drop then a significant recovery once the coronavirus is under control, then a slow, years-long recovery) in the “Other” category favored by just 6% of respondents.
All of this brings to mind economist John Kenneth Galbraith’s quip about his fellow practitioners of the dismal science, especially when they wander from analyzing what has happened and begin speculating about what will happen: “The only function of economic forecasting is to make astrology look respectable.”
More importantly, it points out what a mistake it would be to base investing decisions on such predictions.
The trickle-down recession
While economists may not be great at anticipating the future, their work can help us understand what’s happening right now. Along those lines, one of the more substantive studies to come out recently was spearheaded by Harvard economist Raj Chetty. He, along with numerous colleagues, highlighted some fundamental differences between this recession and those of the past.
Significant economic downturns are usually marked by cutbacks in spending on big durable goods, like a new washing machine or car. The service sector is typically one of the most resilient parts of the economy. But Chetty and his team say this recession is altogether different, driven by cutbacks in spending at restaurants, hotels, and other service-sector businesses staffed by thousands of lower-wage workers.
They estimate that the highest-earning quarter of Americans have been responsible for about half the decline in consumption during this downturn. And that has wreaked havoc on the lower-wage service workers whose livelihoods depend on such spending.
Reopening without the right reason
In recent weeks, while some spending has picked up, spending by high-income households has been much slower to come back. Chetty believes allowing service businesses to reopen won’t be enough to get that spending back to pre-pandemic levels until people feel safe going back to those businesses.
"The fundamental reason that people seem to be spending less is not because of state-imposed restrictions," Chetty told NPR. "It's because high-income folks are able to work remotely, are choosing to self-isolate and are being cautious given health concerns. And unless you fundamentally address that concern, I think there's limited capacity to restart the economy.”
With new spikes in coronavirus cases in many states that have been reopening their economies, many are having to close them back down again, adding even more uncertainty to the recovery.
Much like President Bush implored people to go shopping in the wake of the 9/11 terrorist attacks and the resulting economic downturn, perhaps the best thing anyone who still has their job can do for the economy right now is to pick up tonight’s dinner from a local restaurant. And even though you won’t be served table-side, leave a generous tip.