The two most important questions you will hear during any recession are “When will it end?” and “How quickly will we recover?” The answers to both of these questions can be found by analyzing the shape of the recession.
[VIDEO] Understanding V, U, W, and L Shaped Recessions
Recessions come in many shapes and sizes. However, economists tend to refer to the following four shapes the most:
- V-shaped recession
- U-shaped recession
- W-shaped recession
- L-shaped recession
V-shaped recessions are recessions that begin with a steep fall but then quickly find a bottom, turn back around and move immediately higher. A V-shaped recession is a best-case scenario.
The recession of 1990 to 1991 and the recession of 2001—both of which only lasted eight months—are considered to be V-shaped recessions.
U-shaped recessions are recessions that begin with a slightly slower decline but then remain at the bottom for an extended period of time before turning around and moving higher again.
The recession from 1971 through 1978—when both unemployment and inflation were high for years—is considered a U-shaped recession.
W-shaped recessions are recessions that begin like V-shaped recessions but then end up turning back down again after showing false signs of recovery. W-shaped recessions are also called “double-dip recessions” because the economy drops twice before a full recovery is achieved.
A W-shaped recession is painful because many investors who jump back into the markets after they believe the economy has found a bottom end up getting burned twice—once on the way down and then once again after the false recovery.
The recession of 1980 that double dipped in 1981 and 1982 is a great example of a W-shaped recession.
L-shaped recessions are recessions that fall quickly and fail to recover. An L-shaped recession is a worst-case scenario because they offer no hope of recovery.
The Japanese recession that began in the early 1990s is considered an L-shaped recession.