Watching Friday’s jobs data for the dreaded K-shaped recovery

As early as May, economic thinkers were sketching out four recovery shapes based on the letters V, W, U and L.

V was generally considered the best result as the economy bounced right back. The gloomiest was the L-shape that implied we were going to go down and stay there for a while.

K is not for cohesive

The K-shaped recovery is not quite as doom-laden as an L, but it may be worse for a cohesive society.

The K shape is no miraculous economic invention; it’s merely shorthand for the idea that hardship is not shared equally. It suggests that rather than a single path that we all follow either up or down, the economy is in the process of dividing in two. One arm of the K goes up. The other goes down.

Many economy watchers have already marked its arrival. Certainly in Canadian real estate, the division between those bidding up detached houses to record levels are a sign of the K phenomenon. This week, for example, data from the Toronto Regional Real Estate Board showed the most desirable low-rise homes rose at a staggering 42 per cent year on year.

“Improving economic conditions and extremely low borrowing costs sustained record-level sales in September,” TRREB president Lisa Patel said in a monthly data release.

But while banks are pleased to lend at those low rates to people who have steady jobs, not everyone has access to that cheap money. Nor does everyone feel like going out on a spending binge.

TRREB data shows highrise condos only increased in value by one-sixth as much, and other data has shown that rental prices are weakening, further signs of a two-speed economy.

In its most extreme interpretations, as discussed earlier this week in the Wall Street Journal, the division between the well-employed and the unemployed is stark and in danger of growing, especially in the U.S., where Congress has not yet agreed on a new income support plan.

Striking disconnect

“The divergence helps explain the striking disconnect of a stock market and household wealth near record highs, while lines stretch at food banks and applications for jobless benefits continue to grow,” said the Journal.

The K pattern may be visible in Friday’s unemployment data. Effectively the upward pointing bar of the K includes that group of people with stable incomes who are able to keep doing their jobs using their computers from home. Those people, usually in management, administrative or technical kinds of jobs, have traditionally been better paid. Teachers and medical professionals are in that group.

While retired people may have been more isolated, partly in fear of being the most susceptible to the virus, their incomes are mostly on the top bar of the K, as low interest rates push investments up and pension funds fatten.

A third group whose incomes are rising and stable might be seen as those providing services to the other two groups. Delivery people and Amazon warehouse workers at the low end of the wage spectrum and well-paid contractors doing fix-it work on houses of the well-employed would tend to be on the rising bar of the K.

The great divide between the two arms of the K reminds me of my favourite Wall Street Journal headline from the last recession, which applies again today: “Wealthier Households Carry the Spending Load.” As I commented at the time, as well as having to get all the money, the long-suffering rich had to do all the shopping as well!

The downward-pointing bar of the K includes many lower-paid people, including hotel cleaning staff and other hospitality and retail workers, which will disproportionately affect recent immigrant groups and women. But it also has affected many traditionally well-paid employees in the travel-related sector including another round of layoffs at Boeing, possibly today. And those workers don’t come cheap.

As energy demand falls, jobs in the well-paying oil and gas sector have tightened further. Business owners and people in the lucrative commercial property sector have suffered income loss and some have effectively lost jobs.

Shrinking profits

In new research released today, the Business Development Bank shows that 76 per cent of small- and medium-sized businesses have watched revenues and profits shrink and are looking for ways to pivot their businesses to succeed in the post COVID-19 era.

There are two things to watch if upcoming statistics, including jobs numbers, show that the letter K is the best alphabetic descriptor of where the economy goes next.

The first is that a long-lasting shortage of work even after the lockdown ends is likely to have a macroeconomic effect on the entire economy, cutting growth and reducing the circulation of money.

But the other lesson learned in the 1930s is that even a shutdown that throws 25 per cent of employees out of work does not cause the entire economy to grind to a halt. Those whose families lived through the Great Depression will know that for households in which one person was among the 75 per cent who still had a job, that family continued to buy and spend and live in a surprisingly normal manner. Jobless families suffered much more.

That’s why Parliament’s unanimous vote in favour of a long-term benefit plan may provide Canada with an economic advantage, helping the most unlucky to eke out a living until the jobs come back or new ones are created.

Follow Don on Twitter: @don_pittis