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What is the K Economy?

What is the K Economy?

October 29, 2020
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The third quarter 2020 GDP (Advance Estimate) shows that real gross domestic product (GDP) increased at an annual rate of 33.1% in the third quarter of 2020, according to the advance estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased by 31.4%.1
  
 
Q3 GDP showed a strong rebound after the sharp drop in Q2, caused by business closures due to the pandemic.

But not all parts of the economy are recovering at the same rate. Some parts have rebounded strongly and some have not, which leads to the question: are we having a K-shaped recovery?  In the next section we will discuss in more detail what a K-shaped recovery looks like.   

Are we Having a K-shaped Recovery?

An economic recovery that is K-shaped, means that part of the economy is improving and getting better, while other parts of the economy are struggling and may even be getting weaker.

The graph below shows the K-shaped recovery when we look at unemployment2. There is an unequal trajectory where higher-wage workers have returned to work at a much greater rate than lower-wage. As of August, data shows the unemployment rate of those making $16/hour was still increasing while higher-wage workers recovered significantly more.
  

Jobs requiring face-to-face personal interaction, consumer travel or larger groups also represent sectors of the economy with higher unemployment rates and result in an unequal economic recovery.
 
 
Strong or Improving Parts of the Economy Trends:

When offices and schools were closed this year pushing workers and school children to stay at home, there was a strong demand to purchase personal computers and tablets. Demand on the internet surged rapidly as workers and students were sent home in March. This created a huge need to improve the speed, bandwidth and infrastructure for the internet.

Demand for many cloud computing companies increased. In the past few years, more and more consumers were moving to purchasing goods online and the pandemic has accelerated this trend. We think this is a trend that will continue in the future, so we recently added a fund in client accounts with companies in the online purchasing and electronic purchasing segments.

When companies transitioned to work from home, we saw several trends emerge. First, people spending lots of time at home decided to fix up their home and home improvement companies benefitted. Also, some companies told employees they could work from home indefinitely. This caused some people to migrate out of big cities and home sales in smaller towns increased while very low home mortgage rates also helped make payments lower for new home buyers.

We have also seen companies in the clean energy business doing well. Could this be anticipation of Joe Biden winning the election and implementing his clean energy policies?  Or is this the continuation of a trend towards cleaner energy that has been increasing the past few years?

Weak or Declining Pats of the Economy Trends:

Many small businesses have struggled this year due to business limitations implemented to reduce the virus spread during this pandemic. This has caused banks to put aside considerable assets in reserves for potential loan losses.

Significant layoffs have occurred by companies in the travel and leisure industries. These include businesses in the industries of airlines, cruise lines, hotels, live entertainment, theme parks, sporting events and business conventions, plus all the businesses that support these industries.

The decline in all forms of travel this year have resulted in a significant decline in oil usage. While it is nice to see lower prices at the gas pumps, it has been difficult on the oil industry.  

Putting It All Together

When designing portfolios for clients, technology has been an important component for the past 6 months. While we think the role of technology companies will remain strong as we work through this pandemic, we are also looking for the trends that will emerge going forward. We think online shopping and commerce will emerge strong out of this pandemic, causing us to add a fund for clients from this industry. As the economy reopens over the next year, we will look for more opportunities.
  
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References

1 Bureau of Economic Analysis – Gross Domestic Product, Third Quarter 2020 (Advance Estimate)

2 Business Insider – One staggering chart shows the unequal K-shaped economic recovery that's playing out — and the 'double hit' facing low-income workers