Macroeconomcs

Now that we have learned about the business cycle & its phases, let’s apply our knowledge to a Discussion.

There is little doubt that we are currently in the midst of a recession, bringing the longest Post-World War II expansion to an end. And though the primary cause of this recession (the COVID-19 pandemic) differs from the previous one–the primary cause of what would become known as the Great Recession, was a world-wide credit market meltdown–I’ve noticed a similar phenomenon. Recently there has been a good deal of speculation concerning what this recession & eventual recovery will look like. For example, there are those who suggest it will have a V-shape; i.e., a deep slump with a quick snap-back into recovery. Some have suggested it will have a  U- shape–a fairly deep somewhat drawn-out downturn, but eventually we’ll experience a recovery. Or perhaps a W-shape similar to the early 1980’s, where the US experienced a “double-dip” recession. Or a L-shape–a deep downturn with a recovery in the far distance. An inverted square-root sign? A Nike swoosh? President Trump’s hair? You get the idea.

Now as for those who have championed the V-shape version, I disagree. There is some talk that due to the partial economic shut-down there is a lot of “pent-up demand”, and as a result the economy will swiftly rebound when the shut-down is ended. The problem with this is–as you have learned–almost 70% of consumer spending is on services. And recall, it is the consumer that drives this economy. Now granted, we might see an acceleration in durable goods purchases, but durables make up only 10.5% of consumption. So where is all that “pent-up demand” going to come from? When the closure is ended is everyone gonna go out at get the 5 haircuts they skipped? Eat 75 Big Macs in a week (I would NOT recommend this)? Take 4 months’ worth of plane trips in a couple of days? And so on. I suppose I could be wrong, but my opinion of what this recession/recovery will look like is not important–what say you?

Click me:    https://www.nytimes.com/2020/05/11/upshot/virus-lasting-economic-effects.html

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A month ago, I would have thought that the economy would be in a slump for a long time considering that no one will do non-essential things like holiday travel, restaurant dine-in, etc. anywhere for a long time at least and until a vaccine has been made. This led me to think that the economy might recover in a long U-shape as it would take somewhere between 6 months to 2 years for life to return to somewhat normal. Recently though, many countries and cities have had second waves of the virus. This news along with the New York times article has changed my perspective of how the economy will recover.

Presently, the government stimulus packages have helped in a slight recovery of the economic slope along with the stock market. But many people fear that the economy will have a downward trend due to the possibilities of a second wave of the virus and bankruptcies as many businesses may not be able to sustain themselves. This would lead to the economic slope to be a W-shape (similar to the 1980s) for the next two years until the economy fully recovers from this pandemic.