Why do these economists say the recovery will be L-shaped?
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The debate that rages in economic circles is which letter the path of the American economy will most resemble, and a new research paper has a depressing answer.
The US economy is likely. USA Having an L-shaped recession, according to a new working document released by the National Office of Economic Research.
The reason, according to Victoria Gregory and Guido Menzio of New York University and David Wiczer of Stony Brook University, is their estimate that unemployment will not fall quickly. Data released by the Department of Labor on Friday showed that the unemployment rate in the United States fell to 14.7% in April, from just 3.5% in February.
They say that once the lockout is lifted, the speed of recovery depends on the number of unemployed people who maintain a relationship with their former employer or can find a new job.
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Using data from the Longitudinal Survey of Employers and Household Dynamics and the Survey of Income and Program Participation, they find that what they call "finicky" workers: those with low productivity, long spells of unemployment and a low probability of remaining employed for more than two years: they are concentrated in some of the industries most affected by the closure.
They say the unemployment rate would still be around 5 percentage points above normal 30 months after the start of the pandemic, and still around 2.5 percentage points above normal 50 months later.
Their simulation reveals that the fraction of workers whose employment relationship ends definitively is around 35%. They claim that this is consistent with survey data, which finds that between 40% and 50% of workers who became unemployed in the first month of closure do not expect be retired from their previous job.
For the recession to be V-shaped, the initial permanent peak unemployment rate should only be 5%, they find.
Their model assumes a three month and 12 month uncertainty block.
Worse, they find that their simulation "represents a lower limit to the effect of the pandemic on unemployment". They are particularly concerned about blockages that last more than three months, although they say that a six-month blockade would not affect both long-term unemployment and employers' bankruptcies.
Although the researchers did not extend their results to the stock market, the implications of an L-shaped recovery would be serious. Societe Generale strategists find that the market is pricing between a V-shaped and U-shaped recovery, and has stated that an L-shaped recovery would take the S&P 500
SPX
until 2030.