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What is a K-Shaped Recovery & What Does It Mean for You?

You’ve probably heard about the K-shaped recovery, whether or not you follow economic news.

The term was popularized in 2020 by an economics professor who observed that after the first wave of COVID-19 in the U.S., “things were improving rapidly,” for some people and businesses, “while for others, things were getting far worse.”

“Like the arm and leg of the letter ‘K,’” he reflected in a LinkedIn post, “groups were heading in opposite directions.”

What is a K-Shaped Recovery?

It’s shorthand for an economy that recovers unevenly from a recession, where the gap between the haves and the have nots grows ever wider.

Experts track things like GDP, unemployment, wages, business production, and inflation to measure how sectors, populations, and industries recover from an economic downturn.

Plotted on a graph, the indicators often coalesce to resemble a letter of the alphabet, as in U, V, W, or L. In other words, the overall economy typically rises and falls as one entity. Even if some groups shoulder a greater impact from a recession, the difference often isn’t remarkable or lasting.

The pandemic recession has been remarkable. Because some aspects of the economy obviously rebounded and others stagnated or declined, the graph looks more like the letter “K.”

Read More: How COVID-19 Shaped Financial Confidence in 2021

K-Shaped Recovery vs. V-Shaped Recovery

A V-shaped recovery is closely related to a K-shaped recovery. Both indicate an economy that sharply declined from the peak of a business cycle and then spent a short time at the bottom, indicating a recession.

In a V-shaped recovery, the economy makes a rapid, unified return to a state of growth or expansion. In a K-shaped recovery, one or more groups are noticeably left behind.

Why is the Economic Recovery From the Pandemic Described as K-Shaped?

The pandemic showed clear divisions of fortune within the economy. After government aid started flowing, some sectors quickly returned to pre-pandemic levels of growth, or better, while others did not. This led to a trickle-down effect, either driving or stalling the recovery of related industries, businesses, and individuals.

Suzanne Clark, CEO and president of the U.S. Chamber of Commerce, shared a theory of how the “K” formed in a September 2020 blog post. After the initial shock of the virus, she said, some tech companies and retailers created products and services that helped people work and attend school virtually, shop, and manage their health from the safety of their homes (think Zoom and Amazon).

The success of these companies kept high-earning, remote-eligible workers employed. It also propped up the stock market, lining the pockets of American investors, who are mostly wealthy and white.

 

Meanwhile, Clark wrote, social distancing and other public health restrictions left “countless companies” in leisure and hospitality, food services, travel, and entertainment in the red. Layoffs in those industries impacted the workers “least able to survive prolonged joblessness,” Clark wrote, “creating a cascade of setbacks from which it will be very hard to recover.”

In this theory, the upper arm of the “K” was occupied by tech and retail companies; high-wage workers; and wealthy investors. The lower arm of the “K” was occupied by in-person businesses that struggled to stay afloat and the workers that were furloughed or laid off as a result.

The divergent paths of recovery were still clear a year later. By August 2021, Opportunity Insights, a nonprofit research organization at Harvard University, declared that the recession had ended for high-wage workers, while job losses persisted for low-wage workers.

How is the K-Shaped Recovery Widening U.S. Inequality?

The pandemic worsened socioeconomic disparities that already existed in the U.S. That’s because people with fewer resources to dig themselves out of dire straits — young adults, renters, low-wage workers, women and caregivers, and Black households — were hit hardest.

Even though there were some positive outgrowths of the pandemic, the benefits haven’t been distributed equitably.

Homeowners, for example, gained trillions of dollars in equity thanks to surging home values. But that wealth went mostly to white Americans, whose homeownership rate is 31 percentage points higher than Black Americans.

The stock market also hit record highs during the pandemic, but Federal Reserve data shows that 89% of corporate equities and mutual funds are owned by the wealthiest 10% of Americans.

Rising inflation could help fuel a K-shaped recovery. Without meaningful and consistent wage increases, lower-income households will struggle to afford higher food, gas, energy, and rent prices.

Government response is one of the biggest factors shaping the economic recovery. How the Federal Reserve reacts to rising inflation and whether Congress approves more financial aid for people and businesses still struggling will determine when (and if) the U.S. economy will rebound.

 

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Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Third party data is obtained from sources believed to be reliable; however, Personal Capital Corporation (“PCC”) cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Personal Capital of the contents on such third party websites. Certain sections of this blog may contain forward-looking statements that are based on our reasonable expectations, estimates, projections and assumptions. Past performance is not a guarantee of future return, nor is it indicative of future performance. Investing involves risk. The value of your investment will fluctuate and you may lose money.  Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.
Tanza is a CERTIFIED FINANCIAL PLANNER™ and former resident CFP® for Business Insider. She breaks down personal finance news and writes about taxes, investing, retirement, wealth building, and debt management. Tanza is the author of two ebooks, A Guide to Financial Planners and "The One-Month Plan to Master your Money."
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