MIKE WALDEN COLUMN: Recession, recovery or something else?
When I speak to groups — virtually for more than six months — I perceive two concerns. One is fear about the virus, especially how long it will last and whether a vaccine will be effective. The second is confusion about what’s happening with the economy. Is the economy still sliding in a recession, is a recovery underway or is something else occurring?
Since I’m certainly not a scientist who can address questions about the virus, I’ll take a pass on the first concern. Instead, I’ll focus on where we are and where we’re going with the economy six months into the COVID-19 pandemic.
To an economist, the definition of a recession is fairly simple. The economy is in a recession when total economic activity is contracting for a significant period of time. While there are numerous measures of “economic activity,” the major one is “gross domestic product” (GDP), which is the total amount of production by all workers and businesses. While GDP is the go-to measure, other important measures — like employment — tend to move with it. The “significant period of time” is usually set at six months (two quarters).
Applying this definition shows we’ve been in a recession for the first half of 2020. But it appears the economy has turned around in recent months. Although we won’t have the third quarter (July, August, September) GDP number until late October, there have been monthly job gains since May.
So if we go by the textbook definition of a recession — that a recession only occurs when the economy collectively is retreating — then we’re now out of the recession. Some forecasters think the gain in GDP in the third quarter will be almost as strong as GDP’s drop in the second quarter.
Yet try telling this to the restaurant owner facing bankruptcy or the janitor furloughed from a cleaning service. To them the recession won’t be over until they get their business or job back.
So rather than putting the economy into an either/or situation — meaning we’re either in a recession or we’re not — it may be better to describe today’s economy in some other way. One option is to describe how today’s economy is affecting different groups of people.
Economists have long used letters of the alphabet to describe the aftermath of an official recession. The most favored of these letters is the “V.” The left side of the V describes the sharp, quick drop of the recession, which is very similar to what the numbers show we’ve had. The right, upward side of the V, shows a quick recovery in the economy that lifts all boats and rapidly restores the jobs and incomes that were lost.
However, many economists are using a “K” to describe today’s current conditions. While recognizing an economic recovery is occurring, the two right-side prongs of the K indicate the recovery isn’t consistent for everyone. The prong pointing upward symbolizes those people improving during the recovery, while the prong pointing downward represents those still struggling.
Looking at the details of North Carolina’s job market suggest the K-recovery may be a good description of what’s recently been happening. Overall, by August North Carolina had regained nearly half of the jobs that were lost between February and April, but the job recovery was almost completely in professional, financial and government jobs, with jobs in each of these categories no more than 3 percent under their pre-pandemic levels.
In contrast, in August jobs in the leisure and hospitality sector were still almost 30 percent lower than in February. Also in August, continuing job losses in leisure and hospitality accounted for over 40 percent of all continuing job losses in the state.
Compounding this dichotomy, the two groups are very different in earnings. Earnings in the fast-recovery sectors of professional, financial and government jobs are two to three times higher than earnings in leisure and hospitality jobs.
The conclusion is we have a strong economic recovery for some and a weak economic recovery for others. Furthermore, those experiencing the strong recovery tend to have higher earnings than those facing a weak recovery.
It could be the slow-recovering sectors will eventually catch up. However, this may be wishful thinking. We’re already seeing stories of hotels permanently reducing their staff by substituting machine check-in and robot cleaners for people performing those tasks, all in the name of minimizing personal contact. Restaurants may go in the same direction, especially if capacity restrictions stay in place.
The country has already been facing an issue with widening income inequality between those with more and those with less. It appears the post COVID-19 economy may compound this challenge.
The numbers tell us the recession is over and an economic recovery has begun. But the numbers also tell us the economic recovery is not the same for all businesses and all workers. Does this put us in the situation of neither a recession nor a recovery, but “something else?” You decide.
Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.