What is a U-Shaped Recovery?
A U-shaped recovery is a type of economic recession and recovery that resembles a U shape when charted. A U-shaped recovery represents the shape of the chart of certain economic measures, such as employment, GDP, and industrial output. This shape occurs when the economy experiences a sharp decline in these metrics without a clearly defined trough but instead a period of stagnation followed by a relatively healthy rise back to its previous peak. A U-shaped recovery is similar to a V-shaped recovery except that the economy spends a longer time slogging along the bottom of the recession rather than immediately rebounding.
- A U-shaped recovery is so-called because major measures of economic performance take on the shape of the letter “U” during these periods.
- U-shaped recoveries happen when a recession occurs and the economy does not immediately bounce back, but tumbles along the bottom for a few quarters.
- Examples of U-shaped recoveries are the 1973-75 Nixon recession and the 1990-91 recession following the S&L crisis.
Understanding U-Shaped Recovery
A U-shaped recovery describes a type of economic recession and recovery that charts a U shape, established when certain metrics, such as employment, GDP, and industrial output sharply decline and then remain depressed typically over a period of 12 to 24 months before they bounce back again.
Simon Johnson, former chief economist for the International Monetary Fund, described a U-shaped recession like a bathtub in an interview with PBS in 2009. “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.”
In April 2020, a 60% majority of CEO’s surveyed by YPO, a global association of chief executives, said they were planning for a U-shaped recovery from the current recession. In a separate survey by Reuters, 55% of economists agreed on the prospect of a U-shaped recovery. If these predictions are correct, then they suggest a recession extending well into 2021. Only time will tell.
Common Recession Shapes
Recession shapes are shorthand concepts used by economists to characterize various types of recessions. Any number of recession and recovery types may conceivably be charted, although the most common shapes include U-shaped, V-shaped, W-shaped, and L-shaped.
- V-shaped recessions begin with a steep fall, but trough and recover quickly. This type of recession tends to be considered a best-case scenario.
- W-shaped recessions begin like V-shaped recessions, but turn down again after false signs of recovery are exhibited. Also known as double-dip recessions, because the economy drops twice prior to full recovery.
- L-shaped recessions are worst-case scenarios, describing recessions that fall quickly but fail to recover.
Examples of U-Shaped Recessions
Of the U.S. recessions charted since 1945, approximately half have been described by economists as U-shaped, including the 1973-5 recession and the 1990-91 recession.
1973–1975: Nixonomics, the Gold Window, and Stagflation
One of the most notable U-shaped recessions in U.S. history was the 1973-75 recession. The economy began to shrink in early 1973 and continued to decline or show only slight growth over the next two years, with the GDP dipping 3 percent at its deepest point before finally recovering in 1975. The roots to this recession lay in the inflationary policies of the preceding years to simultaneously finance the Vietnam War and the Great Society welfare state expansion under President Johnson, Keynesian deficit spending policies under President Nixon after him, and the resulting break of the last links between the U.S. dollar and gold.
The onset of the recession was marked by the 1973 oil crisis and increased oil prices as well as the 1973–74 stock market crash, one of the worst stock market downturns in modern history, which affected all the major stock markets in the world. The recovery was marked by persistently high unemployment and accelerating inflation that would characterize the 1970’s as the era of stagflation.
1990–1991: The Jobless Recovery
The deregulation of banks and savings & loans in the early 1980’s kicked off a boom in commercial and residential real estate lending that really took off as the Fed loosened monetary policy and interest rates fell after the economy emerged from recession in 1982. This boom would build into a debt bubble of risky mortgages and shady banking practices that burst in the late 1980’s in a debacle known as the S&L crisis. The resulting massive losses, debt deflation, and bank failures across the real estate and financial sector led to recession for the broader economy in mid 1990.
Though mild GDP growth reappeared the following year, job losses continued and unemployment rose through mid 1992, and total employment did not regain its pre-recession level until 1993. Because of this, the recovery from the 1900–91 recession has been dubbed the Jobless Recovery, and can be considered an example of a U-shaped recovery.