- Even as the US economy slowly climbs back from the depths of the coronavirus recessions, economic pundits are now worried about the "K-shaped" recovery.
- A "K-shaped" recovery is one where the wealthiest recovery while lower-income Americans see their economic situation continue to decline.
- But data shows that the US economy is seeing a broad recovery and there are a clear reasons for the divergent outcomes for different types of industries and workers.
- The concern over the "K-shaped" recovery is also missing key context. This isn't new to the pandemic recovery story, inequality has worsened for decades — especially during and right after economic crises.
- Neil Dutta is the head of economics at Renaissance Macro Research.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider's homepage for more stories.
Peruse economic and financial market pundits on Twitter and you'll quickly find the following: anyone that believes the US recovery from the pandemic-driven collapse to be "V-shaped" – that is, quite rapid – is a complete fool (dunking on Larry Kudlow is easy from the peanut gallery), but those that see a "K-shaped" recovery — a recovery in which the wealthy are bouncing back but lower-income Americans are doing worse — are among the enlightened few.
But in the debate over the "shape" or pace of the economic recovery, important nuance is often lost. And in this case, there are ways the K-shaped recovery story makes sense and ways that it is quite misleading.
While there are clear signs of bifurcated growth among the wealthy and the poor, this is not a new phenomenon, and if the pandemic is brought under control, there is good reason to expect inequality to fall as economic lockdowns are lifted.
The V-shaped, and K-shaped parts of the economy
Let's start with how the narrative sort of makes sense: there are sectors of the economy that have enjoyed relatively rapid recoveries and sectors that have not.
Since April, we have seen V-shaped recoveries in the following sectors – note we are looking at levels, not rates of change here:
- Housing: Single-family residential real estate has enjoyed a swift recovery – so much so that residential investment is tracking roughly 50% annualized in the third quarter. That would essentially put residential investment back to its pre-pandemic first quarter level in real terms. New home sales have already hit cycle highs, residential construction is next.
- Durable goods spending: Like homes, durable goods are big-ticket items that require some degree of confidence on the part of the consumer buying them. As of August, household spending on durable goods – cars, appliances, furniture, jewelry – has exploded, up 8.9% since January in real terms. The recent uptick in auto sales to an annualized number of 16.4 million in September implies the momentum continues.
- Core capital goods: There are also signs that companies are making significant investments in new equipment and big ticket items. The baseline for bread and butter capital goods outside of things like defense contractors and big airline orders — nondefense capital goods ex-aircraft orders and shipments — are above January's levels in real terms. Capital spending intentions, that is what businesses say they plan to invest going forward, across several regional manufacturing surveys have improved in recent months, a sign that some of this good news could continue.
In short, the durables sectors have enjoyed a rapid recovery. There are plenty of V's out there.
Of course, there are areas in the economy that are not doing well, primarily in the services industry. It should not be surprising to anyone that activities that require close physical proximity to end consumers will have a tougher time during a pandemic, when people are encouraged to keep distance from each other.
Casual dining restaurants, amusement parks, air travel, and hotels are not having good runs lately (though one can make a case for optimism in the year ahead, but that's another column). It should be noted that none of these sectors have seen activity worsen since April, they've only improved at a much slower pace relative to other areas in the economy. Not really a "K" — which would signal continued decline — so much as a "swoosh" — a slower, more gradual climb.
This is how the K-shape recovery story sort of makes sense. Some sectors do well and some sectors don't do as well.
A K-shaped history
This sector story is not what most seem to be thinking about when they think about a K-shaped recovery. Instead, the story is about income inequality.
A recent article from CNN Business notes, "the economic bounce-back is bifurcated like a 'K': The wealthiest Americans are quickly rebounding, even thriving, while the middle- and lower-income set are not."
But analysts using this talking point are being disingenuous for at least two reasons.
First, the Gini ratio for households — a measure of income inequality — has been rising fairly steadily since the late 1960s, though the US saw some small progress in the last few years as the jobs market tightened. The broader story is that packaging old wine in a new bottle isn't particularly insightful.
Second, at the time the pandemic struck, an outcome like this was inevitable given the card most countries on Earth were dealt at the time. The industries that are suffering most – restaurants, amusement parks, movie theaters, etc. – tend to require close physical contact with consumers and also tend to be low-wage sectors. A robust fiscal response helps, but the lockdown by itself tends to hit lower-wage industries.
For example, hourly earnings in leisure and hospitality are just over half the average in the private sector. These industries were among the first to be shut down to fight the spread of the virus and are among the last to be turned back on for the same reason.
In the same way that lockdowns exacerbate inequality, getting the virus under control and lifting lockdowns will help narrow inequality. After all, a good chunk of the income shortfall for low-income households likely reflects the lack of consumption by high-income households – particularly for dining and travel.
Bottom-line: There is more evidence of a "V-shaped" recovery in the economy than a "K" and those lamenting the rise in inequality are simply ginning up old tropes without providing needed context.
This is an opinion column. The thoughts expressed are those of the author(s).
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