America's V-shaped vs. K-shaped economic recovery: What does it all mean?
Economists are using a new letter to describe the current situation, and it could affect whether Americans see another stimulus check in 2020.
Joe Van BrusselContributor
Joe Van Brussel is a freelance writer for CNET Money, where he deciphers obfuscatory credit card offers and breaks them down so consumers actually know what belongs in their wallet. He also covers other aspects of personal finance, from life insurance and loans to tax software and the impact of broader economic trends on individuals. Joe believes the United States will win the World Cup in his lifetime, and wishes New York City apartments came standard with thick, noise-reducing windows.
As Washington negotiators continue to battle over how to dot the I's and cross the T's to pass a new economic recovery bill with a second stimulus check, many Americans are curious about K's, U's and V's.
The letters describe the different paths an economic recovery can follow after a recession or downturn. The optimal scenario, in which the economy returns to its pre-recession state quickly and smoothly, is called a V-shaped recovery.
If the economy takes more time to begin an upward trend, it's described as a U-shaped recovery, and an economy that rises and falls before regaining its prior trajectory is called a W-shaped recovery. And there's more.
Read more: How soon could a new stimulus check come and which group are you in?
What is a K-shaped recovery?
Some experts have recently settled on K as their letter of choice. The divergent lines more accurately represent that some portions of the economy are recovering quickly, like the technology and e-commerce sectors, while others lag behind, like travel, tourism and hospitality. The upward line in the "K" represents those sectors that are doing well, while the downward line represents those still floundering.
"The K analogy is certainly appropriate, given how specific the recovery is to different industries," said Holly Wade, executive director of research and policy analysis for the National Federation of Independent Business, the largest small business association in the US. "If you're in an industry that relies on public crowds -- entertainment, gyms, restaurants -- you're still under serious restrictions, and consumer spending has shifted to products and services without crowds."
The K shape manifests in other ways, too. The stock market is doing well, but almost half of the country doesn't own any stock, according to Gallup. People who can work from home can continue working more easily than those whose job requires them to show up, and regions that rely more on tourism or hospitality obviously suffer more than those with a high density of technology jobs.
Watch this: Next stimulus checks: What to expect
What is a V-shaped recovery?
You get a V-shaped recovery when the broader economy recovers quickly, returning to prerecession levels without large sectors or groups falling behind. This is the usual pattern for the modern American economy, with periods of economic expansion followed by periods of contraction. The US experienced a condensed V-shaped recovery following a modest recession in 1953 and a larger recovery following the more severe downturn in 1920. (The 1920 downturn was due in part to economic readjustments following World War I and… the Spanish Flu Pandemic of 1918.)
The current situation is unique in how uneven economic fortunes have been across sectors. More than ever, a worker or business owner's financial situation depends predominantly on the business sector they're in. Most workers in the retail and hospitality sectors are hurting; the delivery and cleaning industries are busier than ever. Bars are closed, but liquor store sales are booming. That's a distinct change from the past, when recoveries relied on broad economic factors like the unemployment rate and gross domestic product, and different sectors moved up or down, more or less in lockstep.
Today, the large aggregate numbers fail to capture the reality of a complex economy with diverse economic sectors and regions, with each sector and region performing differently.
What does this have to do with more stimulus aid and checks?
When it comes to determining the size and scope of a federal stimulus package -- which may include a second stimulus payment of up to $1,200 per person as well as extra unemployment benefits -- the nature of the recovery is important. Even if the stock market is booming or the employment rate is steadily increasing, there may be large portions of the economy that struggle. That's what's happening in the US today.
Those details may also be part of the reason lawmakers are having so much trouble coming to an agreement. The characteristics of the recovery inform the type and extent of stimulus that's needed, but when the recovery is so uneven, it's hard to find a one-size-fits-all solution.
The differences have also stimulated political division, since certain industries and regions may be more closely allied with one political party, increasing or decreasing the urgency for elected officials. If the regions and industries that support you or your party are thriving, passing a new round of relief may be less of a priority.