The K-shaped economic recovery dividing America also applies to companies. Here are 4 implications of that trend, according to a Wall Street chief strategist.

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Certain pockets of the US economy are lagging the broad recovery. How they perform moving forward will determine whether the country can emerge fully recovered or split into two distinct economies, James Paulsen, chief investment strategist at The Leuthold Group, said in a recent client note.

Economists frequently described the virus’s economic fallout as giving way to a “K-shaped recovery,” where wealthier Americans quickly bounce back while lower-income groups and minorities struggle to return to pre-pandemic levels. A similar bifurcation across economic lines is also taking place across companies, according to Paulsen.

The pandemic’s fallout has been particularly concentrated in “social and lower-earning industries,” the strategist said. The trend is perhaps most evident in the labor market. Past recessions saw the unemployment rate for the lowest- and highest-earning sectors jump in tandem as damage was spread more evenly throughout the economy.

Read more: Warren Buffett compared the pandemic to a ‘hurricane,’ praised the government’s rapid response in the spring, and called for small-business aid at a virtual event this week

The coronavirus crisis bucks the trend. The unemployment rate for low-earning industries rocketed to 23% from 3.5% in the early months of the pandemic, and has so far only recovered to 9.6%.

Yet high-earning industries saw their unemployment rate jump to 12% from 3%. Today their rate sits back at 5.5%, nearly touching pre-pandemic levels.

The separate recoveries taking place set the stage for an unusual return to normal, Paulsen said. Outlined below are the four implications of such a lopsided rebound, according to the strategist.

Highlighting inequalities

The clearest impact the split recovery has had is in revealing the country’s economic inequalities, Paulsen said. Just as poorer Americans faced the brunt of the health crisis, they shouldered the most economic pain and joblessness.

With low-earning industries unable to stage quick recoveries, unemployment will linger for far longer among affected companies.

“Alarming levels of homelessness and long lines for free-food distribution reflect the bifurcated nature of this economic crisis,” the strategist wrote.

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Closing the gap

With the nation’s economic inequities forced into the spotlight, the country will enter a new period of expansion more aware than ever of its shortcomings, Paulsen said.

“Ending this pandemic will not only stop the horrific loss of life but will also help to modify growing evidence of economic inequalities,” he said.

Distribution of a coronavirus vaccine can help rapidly close the current gap between low- and high-earning sectors, Paulsen added.

A single-quarter collapse

The divergence of economic fallout helps explain the unusual nature of the 2020 recession and its brevity. Low-earning industries count for about 56% of total unemployment, but just 24% of total employment, according to Paulsen.

While economic pain continues to linger throughout the US, the second quarter of the year was the only one in which every part of the economy was impacted adversely. High-earning industries quickly rebounded in the third quarter, and much of the US already entered …read more

Source:: Business Insider


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