“The Letter of the Day” – US Economic Forecast Edition

There are many people out there right now talking about the path forward for the economy and the letter it will represent. The amazing thing is that I would trust a forecast from the cast of Sesame Street more than these characters. Will it be a “V’ shaped recovery? Will it be a “U”? While I cannot dismiss a “V” shape completely the blind adherence to it is more political cheerleading that is not followed up by any real coherent policy. Let’s talk keyboard characters and how they might be related to economic events.


I am pretty certain we are not heading into an “L” shaped path where there is a decline and then the economy flatlines. The haphazard policies implemented while certainly less than optimal and will be enough to prevent this from actually coming to fruition. There is simply enough money out there in various programs to allow some type of recovery to occur. As a result I am not concerned about the economy hitting a bottom and staying there.


A “U” shaped recovery is typically thought to have a decline with a longer period on the downward end and then a recovery. It is not as short decline as the “V” but it is certainly preferred to the “L”. It would seem to me that there are numerous issues with this structure for the US right now. There is too much up and down right now for this to be the realistic outcome.


The “V” shape is the preferred outcome for a variety of reasons. A sharp decline followed quickly by a sharp increase would seem to have the least amount of economic damage overall. It would be a short decline in activity and there would be something resembling a return to normalcy, if that really is the appropriate way of thinking about this. The issue with this is that there is not a clear policy regime coming forward that will allow this. Let’s even put to the side the fact there are global issues right now making this unlikely to occur. The situation with global oil prices, the ongoing situation with COVID-19 around the world, tensions between the US and trading partners… You start to get the picture. The bigger concern I have is that a “V” can be the beginning of a “W” and those that want to celebrate and rally around the “V” will become complacent and not recognize what policies are allowing this to happen and remove them and create the “W”.


The most likely outcome for the economy right now, in my assessment at least, seems to be a bit of a rollercoaster ride with ups and downs like this letter. There are several reasons for this, not least of which is the current suggestions that Congress will be either slow to act or not act at all to continue supporting the economy with fiscal policy. Fiscal policy really is the only backstop for the demand side of the economy at this time. Without this insurance policy we are left with consumer responses to the uncertainties of the job market, outbreaks of COVID-19, and any other issues that happen upon the economy. This will spell inconsistent recovery for the economy at best. A related question to ask in this situation is why should the Federal Reserve supply consistent support towards the financial and business sectors, and Congress will not (because it is certainly in their power to do so) to the consumer and small business sectors? There are plenty of brilliant economists out there (I’ll throw a pitch in here for Claudia Sahm as my personal favorite to read) about how to proceed in these uncertain times.


Since many of the people I see on TV are ludicrous I thought I would throw in a piece of punctuation. In the realm of punctuation the tilde seems to be another candidate. A little increase and decrease in a rolling fashion? We should be so lucky! This would actually be a reasonable and fairly nice outcome for the economy at some level compared to the volatile ride of late.

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