Recession shapes
Encyclopedia
Recession shapes are used by economists to describe different types of recession
s. There is no specific academic theory or classification system for recession shapes; rather the terminology is used as an informal shorthand to characterize recessions and their recoveries.
The most commonly used terms are V-shaped, U-shaped, W-shaped, and L-shaped recessions. The shapes take their names from the approximate shape economic data make in graphs during recessions. The letters can also be applied referring to the recoveries (ie "V-shaped recovery").
A clear example of a v-shaped recession is the Recession of 1953
in the United States. In the early 1950s the economy in the United States was booming, but because the Federal Reserve expected inflation it raised interest rates, tipping the economy into recession. In 1953 growth began to slow, in the third quarter, the economy shrank by 2.4 percent. In the fourth quarter the economy shrank by 6.2 percent, and in the first quarter of 1954 it shrank by 2 percent before returning to growth. By the fourth quarter of 1954, the economy was growing at an 8 percent pace, well above the trend. Thus GDP growth for this recession forms a classic v-shape
, former chief economist for the International Monetary Fund
, says a U-shaped recession is like a bathtub: "You go in. You stay in. The sides are slippery. You know, maybe there's some bumpy stuff in the bottom, but you don't come out of the bathtub for a long time."
The 1973–75 recession
can be considered a U-shaped recession. In early 1973 the economy began to shrink and continued to decline or have very low growth for nearly two years. After bumping along the bottom, the economy climbed back to recovery in 1975.
The early 1980s recession
in the United States is cited as an example of a W-shaped recession. The National Bureau of Economic Research
considers two recessions to have occurred in the early 1980s. The economy fell into recession from January 1980 to July 1980, shrinking at an 8 percent annual rate from April to June of 1980. The economy then entered a quick period of growth, and in the first three months of 1981 grew at an 8.4 percent annual rate. As the Federal Reserve under Paul Volcker
raised interest rates to fight inflation, the economy dipped back into recession (hence, the "double dip") from July 1981 to November 1982. The economy then entered a period of mostly robust growth for the rest of the decade.
" and lost decade
; compare also "malaise
".
A classic example of an L-shaped recession occurred in Japan following the bursting of the Japanese asset price bubble
in 1990. From the end of World War II throughout the 1980s, Japan's economy was growing robustly. In the late 1980s a massive asset-price bubble
developed in Japan. After the bubble burst the economy suffered from deflation, and experienced years of sluggish growth; never returning to the higher growth Japan experienced from 1950-1990. Because the late-2000s recession in the United States followed a similar economic bubble (the United States housing bubble
) some economists fear the U.S. economy could enter a prolonged period of low growth even after recovering from the recession.
has said the current recession may be an "inverted square root
sign"-shaped recession. Soros explained to Reuters
that this meant: "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shape recovery or anything like that. You settle down -- step down." During the 2001 recession, a trader named Thierry Martin writing for Jim Cramer's TheStreet.com
proposed a J-shaped recovery, which he says was "strictly for optimists" and could be caused by "a new high-tech product category, or even a series of improving earnings reports, [that] could send us sky-high without looking back." Note that the J-shaped economic recovery is unrelated to the J-curve phenomenon.
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
s. There is no specific academic theory or classification system for recession shapes; rather the terminology is used as an informal shorthand to characterize recessions and their recoveries.
The most commonly used terms are V-shaped, U-shaped, W-shaped, and L-shaped recessions. The shapes take their names from the approximate shape economic data make in graphs during recessions. The letters can also be applied referring to the recoveries (ie "V-shaped recovery").
V-shaped recession
In a V-shaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. V-shapes are the normal shape for recession: "There is a strong historical “snap back” relationship between the strength of economic recovery and the severity of the preceding recession. Thus, recessions and their recoveries have a tendency to trace out a “V” shape."A clear example of a v-shaped recession is the Recession of 1953
Recession of 1953
In the United States the Recession of 1953 began in the second quarter of 1953 and lasted until the first quarter of 1954. The total recession cost roughly $56 billion.-Preceding the Recession:...
in the United States. In the early 1950s the economy in the United States was booming, but because the Federal Reserve expected inflation it raised interest rates, tipping the economy into recession. In 1953 growth began to slow, in the third quarter, the economy shrank by 2.4 percent. In the fourth quarter the economy shrank by 6.2 percent, and in the first quarter of 1954 it shrank by 2 percent before returning to growth. By the fourth quarter of 1954, the economy was growing at an 8 percent pace, well above the trend. Thus GDP growth for this recession forms a classic v-shape
U-shaped recession
A U-shaped recession is longer than a V-shaped recession, and has a less-clearly defined trough. GDP may shrink for several quarters, and only slowly return to trend growth. Simon JohnsonSimon Johnson (economist)
Simon Johnson is a British American economist. He is the 'Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He has held a wide variety of academic and policy-related positions, including...
, former chief economist for the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
, says a U-shaped recession is like a bathtub: "You go in. You stay in. The sides are slippery. You know, maybe there's some bumpy stuff in the bottom, but you don't come out of the bathtub for a long time."
The 1973–75 recession
1973–75 recession
The 1973–75 recession in the United States or 1970s recession was a period of economic stagnation in much of the Western world during the 1970s, putting an end to the general post-World War II economic boom. It differed from many previous recessions as being a stagflation, where high unemployment...
can be considered a U-shaped recession. In early 1973 the economy began to shrink and continued to decline or have very low growth for nearly two years. After bumping along the bottom, the economy climbed back to recovery in 1975.
W-shaped recession
A W-shaped recession, occurs when the economy has a recession, emerges from the recession with a short period of growth, but quickly falls back into recession.The early 1980s recession
Early 1980s recession
The early 1980s recession describes the severe global economic recession affecting much of the developed world in the late 1970s and early 1980s. The United States and Japan exited recession relatively early, but high unemployment would continue to affect other OECD nations through at least 1985...
in the United States is cited as an example of a W-shaped recession. The National Bureau of Economic Research
National Bureau of Economic Research
The National Bureau of Economic Research is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community." The NBER is well known for providing start and end...
considers two recessions to have occurred in the early 1980s. The economy fell into recession from January 1980 to July 1980, shrinking at an 8 percent annual rate from April to June of 1980. The economy then entered a quick period of growth, and in the first three months of 1981 grew at an 8.4 percent annual rate. As the Federal Reserve under Paul Volcker
Paul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...
raised interest rates to fight inflation, the economy dipped back into recession (hence, the "double dip") from July 1981 to November 1982. The economy then entered a period of mostly robust growth for the rest of the decade.
L-shaped recession
An L-shaped recession occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. The steep drop, followed by a flat line makes the shape of an L. This is the most severe of the different shapes of recession. Alternative terms for long periods of underperformance include "depressionDepression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....
" and lost decade
Lost decade
Lost decade may refer to:* La Década Perdida , the economic crisis in Latin America in general, and specifically in Mexico, during the 1980s...
; compare also "malaise
Malaise
Malaise is a feeling of general discomfort or uneasiness, of being "out of sorts", often the first indication of an infection or other disease. Malaise is often defined in medicinal research as a "general feeling of being unwell"...
".
A classic example of an L-shaped recession occurred in Japan following the bursting of the Japanese asset price bubble
Japanese asset price bubble
The was an economic bubble in Japan from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble's collapse lasted for more than a decade with stock prices initially bottoming in 2003, although they would descend even further amidst the global crisis in 2008. The...
in 1990. From the end of World War II throughout the 1980s, Japan's economy was growing robustly. In the late 1980s a massive asset-price bubble
Economic bubble
An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...
developed in Japan. After the bubble burst the economy suffered from deflation, and experienced years of sluggish growth; never returning to the higher growth Japan experienced from 1950-1990. Because the late-2000s recession in the United States followed a similar economic bubble (the United States housing bubble
United States housing bubble
The United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...
) some economists fear the U.S. economy could enter a prolonged period of low growth even after recovering from the recession.
Other shapes
Since the terms are informal, commentators will sprinkle in other descriptions. Financial blogger Mike Shedlock describes a WW-shaped recession with the country "slipping in and out of recession for a prolonged period of time, perhaps 3-4 years or more." Financier George SorosGeorge Soros
George Soros is a Hungarian-American business magnate, investor, philosopher, and philanthropist. He is the chairman of Soros Fund Management. Soros supports progressive-liberal causes...
has said the current recession may be an "inverted square root
Square root
In mathematics, a square root of a number x is a number r such that r2 = x, or, in other words, a number r whose square is x...
sign"-shaped recession. Soros explained to Reuters
Reuters
Reuters is a news agency headquartered in New York City. Until 2008 the Reuters news agency formed part of a British independent company, Reuters Group plc, which was also a provider of financial market data...
that this meant: "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shape recovery or anything like that. You settle down -- step down." During the 2001 recession, a trader named Thierry Martin writing for Jim Cramer's TheStreet.com
TheStreet.com
-History:TheStreet.com, Inc., was co-founded in 1996 by Jim Cramer and Martin Peretz. It is traded on the NASDAQ Global Market. The company is headquartered at 14 Wall Street in New York City. Its stock was made public in May 1999 under the direction of past Chairman and Chief Executive Officer...
proposed a J-shaped recovery, which he says was "strictly for optimists" and could be caused by "a new high-tech product category, or even a series of improving earnings reports, [that] could send us sky-high without looking back." Note that the J-shaped economic recovery is unrelated to the J-curve phenomenon.