Posted by: Josh Lehner | April 7, 2020

COVID-19: The Square Root Recovery?

Our office is working on developing the latest state economic and revenue outlook. While much uncertainty remains, the broad contours of the recession and recovery may be coming into focus. While our office previous discussed the underlying conditions that could lead to the classic V or U-shaped recovery, today we’re introducing the possibility of a new path: the square root recovery. The reason will hopefully be self-evident in minute. I wish I could claim the name, but Mark’s the one who coined it the other day in our discussions. The nature of this outlook is beginning to gain some traction among forecasters and among our advisors. The thinking is as follows.

The sudden stop of the economy sends us into a severe recession overnight. Once the health situation improves some, the curve flattens and caseloads peak, the restrictions begin to be lifted. This results in some initial bounce back in economic activity, although far from 100%. We may be able to got out to eat, or get a haircut again, or the like. These firms will staff back up to meet this demand, but is the rebound 1/3 of the losses? 1/2 the losses? We don’t know that answer today. Plus some interest rate sensitive industries like construction or durable goods may come back once households are able to go out and resume some activities, particularly among the higher-income households who are building savings today.

This initial bounce back likely takes the economy from near-depression level readings up to something resembling a severe or bad recession. From there the economy sees slow or moderate rates of growth until the health situation is under control. This may be due to the wide availability of a vaccine, herd immunity or some other treatment (antibody, etc) or development. Remember we are economists trying to translate the public health crisis into an economic forecast. For those familiar with the concept, this time period is the dance part of Tomas Pueyo’s The Hammer and the Dance.

After we have control over the public health side of things, then the economic recovery may exhibit more of the classic U or V shapes depending upon a variety of factors, including how much permanent damage is done during the recession — number of firms that fail, displaced labor, demand destruction, etc — plus consumer’s pent-up demand, monetary and fiscal policies, and the like. Visually, the nature of the recession and recovery resembles the square root symbol.

Even if the contours of recovery may be coming into focus, there are considerable ranges of outcomes at all of these key points. Just how severe is the initial drop? When do health restrictions begin to life, when does the bounce back start? How strong will that be? Is it possible that even as consumer services rebound some, losses in other sectors offset those gains? How long until the health situation really is under control? How much permanent damage have we done to the economy in the meantime? In the weeks ahead our office is asking our advisors to help us map out these possibilities to produce our next forecast for policymakers.

Finally, just to be clear, none of this is designed to be pitting the economy against public health. Research shows they are clearly connected and in past episodes, the economy is stronger in places that improve public health the most. As Bill Conerly said the other week, if you tell me the health outcomes, I can tell you the path of the economy. That remains true today.

Two economic recommendations:

Tim Duy’s latest in Bloomberg where he discusses how depth, duration, and deflation are the likely markers of a depression versus a recession. Tim also highlights how the permanent damage to the economy, and lack of a vaccine or cure for the virus are clear barriers to that initial bounce back being 100%.

A new NBER paper by Guerrieri et al (2020) looks at how a pandemic supply shock can cause demand recessions. For those not interested in an academic paper, I recommend seeing this Tweetstorm by MIT’s Ivan Werning, one of the coauthors.


  1. Considering OEA is steeped in math, the visual similarity of a graph of straight-line segments may be interesting, but for the math-competent in the general public, the naming is confusing at best. I had expected some estimating theory that incorporated the actual square root of some factor; for example, time. In addition, a realistic projection is not likely to be composed of linear segments. More likely there will be a “power” or “log” relationship.

    • Thanks Paul. You’re right they things will never be straight linear segments! The goal here is not that we’re trying to be too cute by half, but rather to highlight some of our thinking as we develop the next forecast. Having a clear visual and easy to understand concept is helpful, even without giving any specific data points, which of course we will have in the weeks ahead.

      • Thanks Josh. I understand the purpose, just suggesting the term “square root” (not the graph) is likely to confuse the math-literate and be a total mystery to the rest. 😉

  2. Hi Josh,

    Have you entertained the notion of a double dip square-root recovery? The idea goes like this: We get an executive order from Washington DC to “Make America Work Again” and this over-rides all of the piecemeal state’s patchwork of closures, and then non-essential businesses will again be allowed to reopen, because “ we can’t let the cure be worse than the disease”, ie Mnuchin, Hannity and the White house all echoing these sentiments of late.

    So before widespread testing, isolation of infected by asymptomatic carries, any viable vaccine or treatment are in place, we are conscripted to return to stores, offices, and public gathering as bans and closures are rescinded. Then another wave of COVID-19 hits forcing curtailments in economic activity and closures are again reinstated, but this time there is much more loss of productive capacity, due to loss of human capital and so many scarce resources devoted toward health care and the long-term health effects that those that survive, but will face debilitating after-effects that reduce productive capacity to wide swaths of the workforce.

    That sort of scenario keeps me up at night!

  3. Might we call this a radical idea?

  4. […] This is an interesting way to look at the eventual recovery, from Josh Lehner at the Oregon Office of Economic Analysis: COVID-19: The Square Root Recovery? […]

  5. Great analysis. What are the years on the x-Axis?

    • Exactly. This is obviously just a general outline of our current thinking. We will be putting exact magnitudes and timing on this when we release our forecast next month.

      • Thanks – looking forward to that!. Stay healthy!

  6. […] Source: COVID-19: The Square Root Recovery? | Oregon Office of Economic Analysis […]

  7. […] Source: Oregon Office of Economic Analysis […]

  8. […] on fixing. And of course the concerns lie with the duration of the public health crisis, the shape and strength of the subsequent recovery, and the ongoing need for financial assistance to struggling firms and households. But for now, the […]

  9. […] not every sector will follow the same path. Our office is still thinking along the lines of a square root recovery overall, but there are underlying differences. Oh by the way, Fed Chair Powell is thinking along the same […]

  10. […] until the pandemic is managed and brought under control. That’s the underlying nature of the Square Root Recovery. Our biggest concerns have been on the amount of economic damage that builds up in the form of […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: