Now that we’re in the middle of a economic downturn, there is a lot of talk about how long it will take to start a recovery. Will the recovery curve take the form of a V (a fast recovery), a U (slower) or even the dreaded L (a long and slow recovery)? It is certainly a hot topic for all of us who own a business. The question is: how fast is your business recover from this crisis?
The good news is that we can go back over the story and past slowdowns for clues as to what might happen next in terms of an economic recovery. When you look back, you can see that economic recessions in the past fell into three categories: structural, cyclical, and event.
1. Structural (an “L” shape)
A structural slowdown is the result of something tied to a fundamental part of the economy. A good example is government regulation. One need only look back to our last recession to see how a legal or policy change by the government can inadvertently lead to an economic recession. In this case, the policy was to relax lending standards to make it easier for Americans to buy homes. It is certainly a noble cause. But what happened instead was that the banks started lending money to people who couldn’t afford the loans or the houses they were buying. Inevitably, over time, the real estate market collapsed like a house of cards, dragging the economy with it. The recovery didn’t start until those bad mortgages were finally wiped out of the system, which took years to accomplish. At the same time, the rules also had to be rewritten to ensure that lending standards are more rational in order to avoid similar crises in the future. The problem with structural slowdowns is that they can take a while to recover, which means it’s more of a cruel “L-shape” that unfolds over several years.
2. Cyclic (Recovery A “U”)
A cyclical downturn is the product of markets exhibiting “irrational exuberance”. In other words, we’ve seen cyclical patterns in the stock market where assets become overvalued to irrational levels and then drop predictably, causing a recession. Just refer to the dot-com boom and bust of 2000 where entrepreneurs with little more than a business plan could raise millions of dollars by going public. The good news is that a recovery from a cyclical event can happen relatively quickly – a shorter U shape – because it only resets market expectations instead of needing a change in regulation. Once the market is cured of its irrationality, it can go back to business.
3. Event-based (a “V” recovery)
Our third category is recessions caused by some event. One example that many of us remember is the horrific events of the September 11 terrorist attack. There was a decent huge market the day after that day. But it didn’t take long for people to overcome their fear of flying or staying in hotels, and the economy rebounded in a shark “V” shaped recovery. Things collapsed – and then picked up – very quickly.
What about the Covid-19 crisis we are currently facing? What category does it belong to? I would say it mixes two types of downturns: it includes certain elements of an event (the pandemic) with certain regulations – the resulting shutdown of the economy through quarantine.
This means that while many people hoped for a ‘V’ recovery, the fact that the virus continues to pose a threat – meaning new regulations could impact the economy and prolong the downturn. This promises to be difficult for businesses like gyms and bars which continue to be constrained by regulations and their ability to open at full capacity. Unless these organizations have the foresight to set aside cash reserves, it might be difficult for them to stay alive until the recovery finally begins fully – which might not happen as long as we do. do not have a vaccine. A national fitness chain, Gold’s Gym, for example, has already declared bankruptcy. Unfortunately, we don’t know for sure when a vaccine might arrive.
Some segments of the economy are facing something closer to an L-shaped recovery as they will need to make structural changes to their businesses and overcome the fear that will persist in the population. A prime example is the airlines, although they have reacted quickly with policies of masks and empty seats to give people space, this is not a long term solution. Their economy does not work with half-full planes. There are fundamental structural changes needed beyond those that were made before people were comfortable flying at the pace that we have done in the past.
Of course, not all businesses have been affected by the pandemic. Companies that make video conferencing, market food or face masks or, yes, toilet paper, have seen increased demand during these times. These companies have not seen a decline at all.
As you look to the future in your business, realize that we are living in unprecedented times. We were all hoping for a V-shaped recovery, but it seems that a U is more likely and in some segments of the economy they will face an L-shaped recovery. But history gives us clues as to how and when we might. bounce back – and much of it will depend on those scientists working hard to create a vaccine that will end the fear that is currently holding the economy back.