Strong economic fundamentals could lead us into a “Y-shaped recovery”
By Art Kleiner
This new economic collapse isn’t fair. Most people still haven’t rebuilt their wealth back from the crash of 2008. Some economists say it could be even worse this time. They say not to expect a V-shaped recovery, surging back to life after a month or so. Maybe we’ll get a U-shaped recovery, with a few months of doldrums and then a rise. Some fear it will be L-shaped, like Japan’s lost two decades: slow, tepid growth tinged with bitterness. The longer it takes to start recovery, they say, the worse the prospects will be.
But I’m not pessimistic about the economy. At a moment when some are arguing that the economic crisis will be worse than the medical crisis, it may be valuable to keep some of the reasons for economic optimism in mind. Not right away — the loss of jobs, work, business, and opportunity will seem so great as to be unbearable, until you compare it to the loss of life and health. Nonetheless, based on fundamentals and some aspects of the business environment, I think there is a plausible case for optimism about a broad economic rebound.
Optimism doesn’t mean things will get back to normal by Easter — or by August. The world will need some time to bounce back, even with all the stimulus money from governments and central banks. But the rebound could be much more robust, rapid, and widespread than you’d expect. There’s a plausible case that, instead of a V, U, or L, the path to recovery would resemble a lopsided Y:
In a Y-shaped recovery, the economy divides into two tracks: slow and fast. Sectors on the bottom (slow) branch of the Y take more than a year to recover, maybe even two years. That includes (probably) airlines, hotels, tourism, automobiles, and energy. Sectors on the (fast) top branch roar back much more quickly. Zoom and Amazon have already begun to roar, and many other companies will follow, including manufacturers, healthcare providers, and pharma companies. As the top branch becomes more productive and prosperous, it will free up consumer spending, and that will raise up many businesses on the bottom branch. They probably won’t have the same business models they had before, but they will come back to life.
The top branch of the Y, the first half of the economy to prosper, contains those industries on the right side of history.
The top branch of the Y, the first half of the economy to prosper, contains those industries on the right side of history. For the economy was already undergoing a dramatic change before the virus struck. This change was driven not just by technological advances — industrial platforms, digital fabrication, predictive analytics, cloud computing and the internet of things — but by the reaction against globalization and the continuing search for better return on investment. Most of all, it is driven by human initiative: there was a sense of possibility, an interest not just in tech innovation but social ventures and new types of business experiments. Even now, when people are so shaken by the crisis, their entrepreneurial spirit doesn’t seem beaten. At least as far as I can tell, it seems energized.
Before the coronavirus crisis, it was going to take probably another 5–10 years for these economic changes to fully emerge. The pandemic, if it follows the path of previous pandemics, will affect those changes, but it won’t negate them. It will probably accelerate them.
Enough resurgence, in enough places, could make many people financially better off than they were before the crash, starting probably in early 2021 (assuming no major coronavirus relapse and no second pandemic or economic shock on the heels of the first). The general prosperity would be enough to get people resuming air travel and other bottom-branch sectors would recover.
In the rest of this article, I’ll explain some of the factors that make this plausible. Three caveats: I include only non-medical non-government non-central bank factors, even though the rate of viral containment is a clear driving force. For instance, if an effective test is found and approved, making it safe to cut down social distancing, that obviously leads to a more rapid economic recovery. And another round of financial stimulus could be needed to help business to stay afloat during the interval of crisis. But those are already well-known factors, so I’m not including them.
Second, my points are superficial summaries, and open to challenge. Each could be an article in itself. But my goal is to show the plausibility of an overall scenario, and I’ve tried to check them with people whose opinion I respect.
Third, this may all be an exercise in wishful thinking. I may be naively keeping my inner Eeyore at bay. On January 21, my former employer and I parted ways, and I relaunched my freelance career. It happened to be the same day that someone with Covid-19 first stepped off a plane in a U.S. airport. This may be my own way of calming my nerves.
Nonetheless, I believe the Y-shaped future is not just plausible; it could turn out to be a self-fulfilling prophecy. If we believe it can happen, we can help make it happen. If so, Tinker Bell, that’s all the more reason to talk about it.
So consider these points in favor of robust recovery, and maybe they’ll lift your spirits as they’ve lifted mine.
This is not a bubble.
At the dawn of the Great Recession in 2007, the magazine I edited (strategy+business) was owned by a startup consulting firm, called Booz & Company, which had recently been launched and suddenly found itself in economic crisis. Paul Branstad, a brusque but revered senior partner, pulled together a manifesto called “Rethink Your Strategy: An Urgent Memo to the CEO.”
Paul and his coauthors said, in effect, that the collapse of the financial bubble and its aftermath would be more severe than most people realized; that many companies would be too weak to survive; and that even strong companies would have to be decisive to take advantage of calamity. They didn’t say much about the plight of working people or homeowners, but that wasn’t the point. This was a broadside to business leaders: Things won’t go back to normal. Not for a long time. Make your decisions accordingly.
While the financial system is not as strong as it could be, at least it hasn’t been systematically weakening itself for the past seven years.
I called Paul this week, to find out what he thought of this crisis. “It’s not the same,” he said. “Last time, there were a bunch of phony monetary assets on investors’ books, with no fundamental value behind them. Banks and financial institutions were borrowing to gamble, and they got in trouble. The world got scared. And stocks cratered.”
This time, it’s different. While the financial system is not as strong as it could be, at least it hasn’t been systematically weakening itself for the past seven years.
The weaknesses are evident.
Paul also had some bad news. This crisis, he said, is “much more complicated.” It is revealing fundamental problems with the political economy, particularly in the U.S., that can’t be solved by monetary policy. He talked about the institutional weaknesses that have emerged in the U.S. during the Trump years, the vulnerability of our economic system to the political fractures, and the ways in which productive capacity, particularly in government-related activity, has disappeared. Thus, he suggested, there’s reason to be pessimistic.
All of these vulnerabilities — in the U.S. and globally — are mitigated, to some extent, because there appears to be a general willingness to talk about them more openly — and perhaps to resolve them. I don’t want to be too Pollyannaish about it, but, as Paul admitted, “the coronavirus could have a palliative impact, especially if it gets bad enough to scare the crap out of everybody. And just barely forces the world to recognize that it’s interdependent.”
People are mobilizing in good faith.
Leaving aside spring-breakers on the beach and some politicians, people have shown that they can pivot to change behavior when they have to. Business people — executives and employees alike — have also shown that they can also pivot when their livelihoods are at stake. They can collaborate across organizational boundaries, reorient their production methods, and offer services that seemed impossible before.
The early examples, as far back as January, were in medical research, but it’s spreading to other industries. As a longstanding writer on management, I appreciate this. “Resistance to change” is the most common complaint among those promoting organizational transformation.
Moreover, some business people are starting to question the assumptions underlying their existing business models. Amanda Cohen, owner of the suddenly-shut-down lower Manhattan restaurant Dirt Candy, wonders in the New York Times whether their competitive pricing was enough all along to really sustain its workforce. “If our workers need charity so badly now, maybe owners weren’t doing this right in the first place?”
When people see the value of change, they act. Right now, they see the value of change. It appears to be in a way that might stick.
There is time to reflect before acting.
The problem with a lot of business action is that it occurs under pressure. There’s no time to think first. People make decisions based on reflex, and those decisions backfire.
Now, busy decision makers have more time. Many are using it to think. We may see better ideas come out of this, including some innovative approaches that didn’t have a chance before.
Supply chains are resilient.
Retailers are expecting weeks of empty toilet paper shelves. They’re not expecting an end to toilet paper manufacturing. The hoarding of products has masked the surprising fact that supply chains (the distribution networks that manufacturers and retailers depend on) are still functioning.
This was not a foregone conclusion: the growth of “just-in-time” production networks over the past two decades has shrunk inventories, meaning it’s easier to run out. But it’s also cut waste and raised the kind of moment-by-moment communications that allow for turn-on-a-dime alternative choices. (What Waze does for traffic routing, just-in-time does for shipping routes, at least when it’s designed well.)
The hoarding of products has masked the surprising fact that supply chains (the distribution networks that manufacturers and retailers depend on) are still functioning. This was not a foregone conclusion.
The coronavirus crisis has also drawn more attention to an already-existing global supply chain problem. Too much of the world depends too much on low-cost high-quality component manufacturing in China. The Chinese government is moving rapidly to bolster its manufacturing position and to keep much of its business, but it may be too late: businesses everywhere are less likely to place their supply eggs in only one basket, even if that basket allows them to cut costs.
China will still be a major manufacturing hub, probably the most critical one; but it will no longer dominate manufacturing to the same extent. We will probably also see alternative sources emerge for raw materials.
Manufacturing footprints are changing.
In an article for strategy+business last year, Dartmouth professor Richard D’Aveni compared today’s production to steam-powered manufacturing around 1900. “Enormous central steam engines drove massive shafts, which in turn sent power to individual cutting and shaping machines through elaborate belts and gears.” When electricity came in, the steam engines were replaced with more versatile motors, but they were still hooked up to those massive shafts. It took decades to redesign the factories to make better use of electric power.
The same thing is happening now with dramatic new technologies like digital fabrication (including 3D printing), data-connected supply chain platforms, and the internet of things. If our overall approach to manufacturing caught up with those technologies, it would be much easier to convert a factory from making one product (like a car) to another (like a ventilator). Instead of installing and configuring new equipment, you would change the software.
The coronavirus will accelerate this, and thus help the world shift further to manufacturing on demand — not just through 3D printing, but through more innovative use of technologies like injection molding (for relatively small production volumes) and laser cutting. “It takes two hours to 3D-print a face shield,” says Tom Igoe, Arts Professor at NYU’s Interactive Telecommunications Program and cofounder of Arduino (makers of a popular hardware/software platform often used for prototyping new products). “That will never generate the volume that New York hospitals alone need right now. So people are doing the best they can, with the tools they have. But for a real recovery, we’d need manufacturers who can figure out how to profit from low-volume, high-turnaround production cycles.”
If factories can be reconfigured on the fly to produce inexpensive ventilators (and it’s not yet clear how many can), they can also retool on demand for other products.
That could happen. If factories can be reconfigured on the fly to produce inexpensive ventilators (and it’s not yet clear how many can), they can also retool on demand for other products. The resulting decentralized manufacturing base would be an economic boon. It would be more flexible, less wasteful, and less vulnerable to tariffs and trade wars. It would also have a workforce less vulnerable to human viruses. (But still vulnerable to the cyber kind.) And this could lead to other economic and environmental benefits, such as (potentially) the further reduction of toxic materials and more local employment.
Middle classes around the world are still growing.
But will there be anyone interested in buying these goods? I think so, for two reasons. First, decentralized manufacturing means more innovative products — which still attract customers. Second, and more importantly, one of the fundamental growth factors for the economy is still in play: the continued emergence of people around the world into the middle class. Since 1990, according to a World Bank estimate, 1.1 billion people have moved out of extreme poverty.
As innovation expert Deepa Prahalad points out (in an article about her father C.K. Prahalad’s concept of “the fortune at the bottom of the pyramid,”) just 20 years ago, half of humanity had yet to make a phone call. Now, “the poor all over the world have cell phones.” Though this movement to the middle class has not been steady, it has been massive, and is ultimately unstoppable. The virus will not stop it either.
Investment capital is still available.
In the Great Recession (and the Great Depression before it), people discovered their assets had no fundamental value. They were left without investment or cash. It was like being forced to sell land on a riverbank that has just become an uninhabitable flood zone.
This time, though the market may continue falling, enough investors will be left with enough cash to still fund productive investment. The activity and technology that they invested in remains of value — indeed, for some of it (like tech platforms and the internet of things), the value is still unrealized.
The volatility of the stock market suggests that they are waiting to use that cash, even now. For the rest of us, low oil prices and interest rates will still be in place, and those factors will contribute to economic growth. The challenge will not be finding money to invest or borrow. It will be finding opportunities to create ventures with credible returns. On the upper branch of the Y, that may be easier than you’d expect.
The “Zoom transition” is real.
In my house, right now, which is in Connecticut and thus under self-enforced strict social distancing, there are two high school students, one college student, one college faculty member, and myself — a freelance professional. The college faculty member is teaching four courses via Zoom. The students are taking all their classes and connecting with their teachers online. I’m conducting meetings this way and taking an adult education course.
Within a few weeks, we’ve all come to take Zoom (and its cousins Teams, Hangouts and Skype) for granted. I feel almost as much intimacy and presence when I connect this way as I did when I was stopping by peoples’ desks to say hello in my old face-to-face office. In some cases, more so.
Few organizations will go back. Generation Z already has adapted to this way of life, and the rest of us will follow. Businesses that take advantage of the full range of mediated-human-contact options, including many professional-services firms, will ride the top branch of the Y. Eventually, face-to-face meetings and conferences will resume. They’ll be less frequent, and last longer. People will want to leave home for special occasions, not to close a deal or sit in someone else’s office. And then the travel industry will rise again, but not with the same customer patterns as before.
In media, the long tail is getting fatter.
Performing artists in all categories are suffering from the lack of face-to-face contact. But that reflects the fact that many have been prospering, at least a bit more than in the past. They’re no longer controlled as much by distributors and intermediaries. The same is true for video producers, writers, podcasters, and all manner of influencers. (Medium itself is one example.)
Self-publishing and self-production are no longer novelties. Attracting an audience is a more viable, steadier proposition than it has ever been. We have only begun to feel the broader economic impact of this change; the virus and its aftermath will accelerate it.
Regulations could get smarter. (Could they?)
Regulations do hold back economic growth, at least when they’re conceived and maintained in adversarial fashion. Deregulation, when it’s mismanaged, is even worse; it can reinforce the worst tendencies of the bottom-feeders in an industry. We really need smarter regulations, and we’re not going to get them quickly. Efforts in this direction, such as Al Gore’s “Reinventing Government” initiative in the 1990s, have famously failed.
But the cost of dumb regulation is more evident than ever, for example in the fumbling of virus test availability. If some small regulatory design breakthroughs occur, perhaps first in the medical devices or pharma arena, that could lead to others. So wrote Amy Compton-Phillips, MD, chief clinical officer of the Providence health care system, in the Wall Street Journal recently.
Truly smart regulations solve the problems of abuse and exploitation, without bludgeoning the industry. Are they possible? Even small breakthroughs could make a difference, and if Dr. Compton-Phillips is correct, that could set an example that ripples through government and then through the economy as early as this year.
Animal spirits still matter.
John Maynard Keynes was not the first to use this phrase, which he defined as “spontaneous optimism” in The General Theory of Employment, Interest, and Money. When people are willing to take risks — to buy things, start businesses, and invest whole-heartedly — it drives an economy forward. William Safire, in one of his great New York Times “on language” columns, traced earlier uses of the phrase back to Daniel Defoe, Jane Austen, Benjamin Disraeli, and Ralph Waldo Emerson. There is no shortage of that sentiment today; if anything, the crisis has brought it forward.
It’s almost as if the economy itself is a living thing, beseiged with an infection, relying on its own immune system to bounce back.
“I always get a lot of work when there’s chaos,” said a friend of mine recently, another independent consultant/writer, in another video chat. “People are open to ideas they wouldn’t consider in more straightforward time.” It’s almost as if the economy itself is like a living thing, besieged with an infection, trying to shake it off, and relying on its own immune system to bounce back.
None of this is certain. But all of it is plausible. And we don’t need all of these factors to happen. We can have a robust Y-shaped recovery with just some of them. Moreover, if those of us with time and capital to spare can move our endeavors in the right direction, that could make a difference.
Some of these factors might reinforce each other. For instance, the long tail combined with a new wave of manufacturing could lead to a new wave of made-to-order products, with the factory workers working in the back of retail store warehouses. Maybe not by 2021, but not long afterwards.
Other uncertain factors may also play a role. For example, now that we’ve seen photos of clean urban waterways when commercial activity shuts down, will that inspire less emission-heavy changes in infrastructure or energy systems? If innovation accelerates in coronavirus-related R&D, will that translate into better approaches for managing climate change? It’s also not clear how the realities of income inequality will shift after Covid-19. The prospects for rescuing local retailers and restaurants are also uncertain. And if Doug Rushkoff turns out to be correct about how online learning diminishes human experience, that could put a damper on restructuring universities.
The Y-recovery scenario is probably the most plausible optimistic future. If it comes to pass, it’s because of its underlying logic: That people learn from mistakes, and when they do, it leads to the general benefit. What if that turned out to be an accurate description of the way the world works, and more powerful than we might expect? To trigger this scenario, not everybody has to be a learner. Just enough people, enough of the time. And that may already have happened.
(Note The term “Y-shaped recovery” has appeared only 8 times before, according to Google search; two of them from this year. This is the first use with this meaning that I’m aware of.)