Bonus Mundo - America's 2020 economy is spelt with a K

G'day, and welcome to a bonus, blog-only edition of Mundo. In this short edition I present the United States' diverging "K-Shaped" economic recovery, and how the prospect of a third wave of the virus risks embedding long-term unemployment in the country, and with it, the kindling for social and political instability.


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Approximate reading time: 2 minutes.


America's 2020 economy is spelt with a K

Research from Harvard economist Raj Chetty shows the diverging "K-shaped" economic recovery underway in the United States. Comparing employment in late August to January 2020, employment rates for low wage workers is 17.5% lower. Yet for high wage workers, it's only 1% lower.



Consumer spending is mixed. Those on lower incomes (whose earnings through employment have been disproportionately harmed, as shown above) are spending 6.5% more than they did in January. High income earners are spending 7.3% less (of presumably a higher absolute value).



By industry, consumer spending remains well below January levels. Spending on restaurants and hotels is almost 28% lower, transportation almost 47%, and entertainment and recreation 53% lower.



When the CARES Act was passed at the end of March, I argued in a piece I wrote for Oxford Analytica that small and medium businesses remained at the greatest risk of financial pain with an untested and ambitious Paycheck Protection Program, and uncertainty over how consumers would spend the cash handouts they received. Both of these risks have proved accurate, as the Covid Crisis prompts a broad redistribution of the American business landscape. As per the graph below, small business revenue continues to suffer, at 23% below January levels.



Across the medium term, domestic pressure for economic protectionism from international competition will grow. The K-shaped recovery is widening the already dire wealth gap in American society. There is fear that the United States is entering its third wave of the pandemic, as infection rates rapidly climb in regional parts of the country. The United States' inability to tame the virus risks stretching economic pain and embedding long-term unemployment if a sizeable portion of those currently unemployed aren't able to transfer their skills and experience to other jobs . The spectre of even deeper economic inequality raises the risk of domestic social instability.


Globally, the trajectory of major economies varies considerably too - which risks intensifying international economic and political competition.



 

Thanks to everyone who has emailed me with their thoughts and ideas. Keep them coming! Forward this along to others who might find this an interesting read. Stay calm, think of others, stay healthy. Mitch

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