What the Alphabet Says About the Economy

The alphabet can be a handy way to describe the economy.

The 1953-1954 recession was a “V”. From a peak, economic activity plunged and then picked up again:

And now, we seem to have a “K.”

The “K” Economy

Composed of close to 68 million people, the top income quintile is doing the spending. Meanwhile, the 280 million (or so) in the bottom 80% are stressed. As a result, we depend on a relatively small slice of the spending pie to sustain prosperity. We have the wealthiest 10% doing 50% of all retail spending:

That takes us to a K with an upward sloping line depicting high income households while the downward sloping bottom line of the K reflects the financially constrained middle and low income group:

Our Bottom Line: Business Cycles

During a business cycle, the economy expands, hits a peak, contracts, touches a trough, and then starts all over again.

A business cycle:

However, the trajectory of economic activity is more like a V, U, Z, W, L, or the Swoosh, than our traditional curve (above):

The rosiest scenario is the “Z.” After the recessionary dip, the economy has a huge bounce, beyond where it would have been. As pent-up demand explodes, we make up for many of our delayed purchases. But still, the realists among us suggest that a “U” or a “Swoosh” is likely.

More pessimistic, the “W” and “L” people see a prolonged drop. The two scenarios are different though because the “W” illustrates a rise that soon reverses like the 1980 and 1982 double dip recessions. As for the “L,” it would remain down if, for example, if tariffs permanently distort global supply chains and decimate smaller businesses.

So, where are we? Most agree that a “K” describes our contemporary economy and the following symbol suggests where we are going:

My sources and more: In addition to Ed Yardeni, Brookings perfectly explained alphabet economics. Then, for firsthand business cycle dates, the NBER website is ideal.

Please note that several of today’s sentences were in a previous econlife post.