The ‘V’ Recovery

In an article at the TSI Blog in May of last year, we explained why the US economic rebound from the H1-2020 plunge into recession probably would look like a ‘V’. Our conclusion at that time was: “There will be a ‘V’ shaped recovery, but due to the destruction of real wealth stemming from the lockdowns the rising part of the V is bound to be much shorter than the declining part of the V. This will lead to a general realization that life for the majority of people will be far more difficult in the future than it was over the preceding few years.” This assessment was close to the mark, but not totally correct.

During the few months after we posted the above-linked article at the TSI Blog our views regarding the likely strength and longevity of the economic rebound — as outlined in TSI commentaries — shifted. Specifically, in commentaries published at TSI between June and November of last year, we began to anticipate a longer rebound with an acceleration of economic activity during the first half of 2021. This was due to a) the central bank’s promise to maintain accommodative monetary conditions for years despite the emerging evidence of an “inflation” problem, b) the eagerness of the US federal government to continue showering the populace with money, c) the expected natural release of pent-up demand as COVID-related restrictions were removed and d) the likelihood of the US government approving a multi-trillion-dollar infrastructure spending program regardless of the November-2020 election outcome. Due to this combination of factors, a full ‘V’ recovery has occurred when measured in GDP terms. This is illustrated by the following chart.

GDP_050521

The GDP rebound does not reflect sustainable progress. Due to the way that GDP is calculated, a dollar of counterproductive spending is the same as a dollar of productive spending. For example, if the government pays people to dig holes in the middle of nowhere and then fill them in, the payments will add to GDP even though the process wastes resources and adds nothing to the economy-wide pool of wealth. Over the past 12 months, there has been a lot of counterproductive spending.

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