What do the letters W, U, V, Z and L have in common? They are all ways to describe the shape of an economic recovery based on trends of the gross domestic product (GDP). A recession is usually defined by two quarters in a row of negative GDP growth. A new letter has been introduced for 2021’s economic recovery. Many economists are now discussing a “K-shaped” recovery.
A recession is usually defined by two quarters in a row of negative GDP growth.
Projections for today’s recovery are characterized as K-shaped because some parts of the economy are expected to recover quickly, while others aren’t. Normally during a recovery GDP rises, incomes go up and unemployment goes down. The modeling of GDP now is reminiscent of the letter K.
The COVID recession is different from other recent economic downturns. Rather than coming as the result of business cycle forces, this recession began practically overnight because of dramatic changes in consumer behavior and actions meant to save lives and slow the spread of a deadly disease. We have already seen that the economic pain of the COVID recession isn’t broadly shared. Many people are more financially secure than they’ve ever been, while thousands of others are forced to turn to food banks to feed their families. Income tax collections remained strong, yet unemployment hit record highs. Some areas of the economy have and will come back quickly, while others will take longer, if they come back at all.
GDP growth will probably resemble a U with the sudden downturn followed by a slower climb.
This year’s economic recovery is partially dependent on getting COVID-19 under control and the degree to which consumer behavior returns to pre-pandemic levels. Overall, GDP growth will probably resemble a U with the sudden downturn followed by a slower climb. The nonpartisan Congressional Budget Office is forecasting a rapid expansion, with real GDP recovering by mid-2021. But hidden within overall trends are divergent recoveries. Which brings us to the “K.”
Already, there are differences in unemployment rates by industry and groups of people. The unemployment rate is one indicator of the health of an industry. As shown in the chart below, financial activities, education and health services, and manufacturing are doing better and have lower unemployment rates that the total unemployment rate, at 3.4 percent, 4.3 percent, and 4.7 percent respectively. On the other hand, the 9.1 percent unemployment rate for the leisure and hospitality industries and the 7.4 percent rate for mining, quarrying and oil and gas extraction are much worse.
Drilling down further into the data, there is variation even within industries. In the education and health services industry, people who previously worked in social assistance are much more likely to be unemployed than former hospital employees.
A K-shaped recovery can mean widening disparities and growing gaps between the “haves” and “have-nots.” According to data from the U.S. Census Bureau, Ohio’s women, parents, people with only a high school degree, and those with lower pre-pandemic household incomes in 2019 were less likely to have been employed in the past week.
Ohio’s women, parents, people with only a high school degree, and those with lower pre-pandemic household incomes in 2019 were less likely to have been employed in the past week.
People with at least a bachelor’s degree were 1.5 times as likely to be working than people with a high school diploma or equivalency. We are also especially concerned about the difference between parents and non-parents, since whether a child grows up in poverty is solely determined by what their parents earn. Ohio adults in families with children were about 1.25 times less likely to be working than those without children.
The widest gap is between Ohioans whose 2019 pre-pandemic household incomes was less than $50,000 and those who earned at least $100,000. Fewer than half of these low-income Ohio adults were working, compared to more than three-quarters of wealthier Ohioans. This data suggests that the poor are getting poorer, while wealthier Ohioans and those who are better educated are mostly sheltered from the economic downturn.
The good news is that although some people and parts of the economy will struggle, the overall U.S. economy is expected to grow. Ohio’s income tax revenues for 2020 did not fall as much as originally feared. The increased Federal Medical Assistance Percentage (FMAP) is covering some of the cost of providing Medicaid coverage to millions of Ohioans, including many who have lost their jobs. Federal stimulus payments also prevented consumer spending from falling further and helped many families make ends meet. In recent recessions, state finances faced a double whammy: demand for services, and therefore expenditures, increased at the very moment that revenues decreased. That isn’t expected to happen this time to the same extent.
Ohio’s income tax revenues for 2020 did not fall as much as originally feared.
Where does that leave Ohio? In this case, a rising tide won’t lift all boats. Needs for struggling families will become more acute. People who were poor before the pandemic may become poorer. History and experience show that Ohio’s recoveries are slower than the country’s as a whole, and it here it will take years – not months – for employment to reach pre-recession levels. However, if reality follows projections, and full vaccine rollout happens by mid-year and federal assistance to states is maintained, the state should be in a fiscal position to be able to invest to help Ohioans battered by the economic downturn and at the bottom of the “K.”
 Data from U.S. Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, Household Data, Not Seasonally Adjusted, Table A-31 “Unemployed persons by industry, class of worker, and sex” for January, 2021.
 Data from the U.S Census Bureau Household Pulse Survey, Week 24, Collected February 3-15, 2021.
 Ohio Executive Budget FY 22-23, “Economic Overview and Forecast”.