A contributed perspective by Stephan J. Hess, CFP
Editor’s Note: This is another installment of a monthly series of contributed pieces addressing financial matters.
When you draw the letter K you probably start with a simple vertical line. Somewhere near the midpoint of that line you then draw two more lines, one rising diagonally upwards towards the top and the other descending diagonally towards the bottom. According to some economists, these two diverging lines represent the two distinct recovery trends that are simultaneously occurring right now as our economy struggles to regain its footing. Some people are doing well, while others are doing quite poorly. Over time there will certainly be more analysis on this, but economists see this as further evidence of a concerning trend.
When the economy experiences a recession, or any other economic calamity, it generally affects us all negatively in some way. Jobs get cut, raises get postponed and people spend less, which hurts businesses, local governments, and just about everything. Remember that recessions are naturally occurring events in a growing economy, so they are not inherently bad. The economy tends to take three steps forward, and occasionally must take a step or two back. Nobody likes this of course, but if over time you are still making forward progress, most people generally feel ok about it. What has historically followed every recession in the past is called a “recovery.” No two recoveries are alike, but typically there is a reversal of the downtrend and the economy strengthens again.
They say all boats fall with the outgoing tide, and then rise together when it comes back in again regardless of whether the vessel is a massive yacht or a small skiff. Ideally, a healthy recovery would be similar and benefit everyone. A “K” shaped recovery describes the latest observation that all boats are not rising in the tide. In this recovery, some boats seem to be rising more quickly, while other boats seem to be stuck in the mud and are taking on water.
As of recently, the S&P 500 was near all-time highs, and with low interest rates, residential real estate is booming. There are many people, and some businesses, who are doing extremely well financially right now. Optimism for them is high and they have surplus money to spend. Naturally, they are on the rising part of the “K” and for them, recovery has been robust and rapid. Other than the inconveniences related to the ongoing pandemic, most people in this group are doing just fine; in fact, they are thriving.
For others, the recovery is barely happening or not at all. These people are on the descending part of the “K” where the recovery for them has stagnated at best, or worse, they are experiencing a spiraling personal decline. With unemployment remaining high, many people are depleting accounts, losing businesses, missing debt and rent payments, and are struggling to meet their basic needs. This group is taking multiple steps back.
A recent study observed that just before this pandemic began, many Americans were finally starting to feel like they were getting back to where they were before the Great Recession. That was over 10 years ago. With inflation, limited raises, and higher healthcare costs, the recovery from that event took an incredibly long time and affected many people. I mentioned earlier that people are generally content with periodic retracement if progress overall was being made. This is not progress. How many more years will it take for this same group to recover from this latest setback? When will they experience some form of personal financial expansion? The economic concern is that more and more people from the middle class are falling into this group.
Meanwhile, the stock market more than doubled during that time, real estate has increased in value, and rental income has risen too. From the untrained eye, it seems that those who own appreciating assets are faring far better than those who do not. Many of those who were financially comfortable 10 years ago are significantly more comfortable today. This “Wealth Gap” has been getting more attention in recent years because it could very well be the proverbial canary in the coal mine. Economists are concerned that too much wealth concentration at the top and a weakened middle class will eventually spell trouble. It looks as if the latest recessions have accentuated this gap and may have even contributed to its acceleration. We’ll let the economists debate this further, but it can’t be good.
Please don’t read anything political into this article. This is not an attack on capitalism or a promotion for socialist ideas. The only statement that is being made is that we all benefit from more people feeling financial safe and financially confident about their futures. Our economy is made up of a lot of important pieces and broad participation is important if we want it to remain strong. A “K” shaped recovery is not optimal. When people are doing well, and they spend money, it strengthens our entire economy and from that, all boats can rise in the tide.
Stephan J. Hess, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional and is the owner of Hess Financial in Harrisonburg. Neither he nor his company has any financial relationship with The Citizen or its publishers.