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The shape of things to come

Recessions almost always follow bear markets, and there is little doubt that the steep market decline driven by the coronavirus pandemic will lead to a severe economic downturn. How bad it gets will depend on the nature of the government response.

Economists have been slashing their forecasts, and the numbers are grim, especially for the second quarter. But what real difference does it make if Goldman Sachs thinks the U.S. economy will shrink by 5 percent and Deutsche Bank expects a 13 percent fall? It’s going to be bad, and the shape of the downturn is what many are focusing on now.

Will it be a V-, U- or L-shaped recovery? Calls for a short, sharp downturn — a V-shaped decline and rebound — have been fading away, as widespread business shutdowns and “social distancing” orders suggest that it could be a while before things return to normal. That implies a more gradual U-shaped trajectory. In the worst-case scenario, the drop in activity lasts so long that it resembles an “L”: falling fast and then staying low.

The shape of bailouts is also emerging, with Senate Republicans presenting their $1 trillion proposal for business loans, tax cuts and direct payments to Democratic colleagues today. But disagreements between the parties in Congress, and between the White House and the Fed, may slow the passage of stimulus measures.