What is W-Shaped Recovery
A W-shaped recovery is an economic cycle of recession and recovery that resembles a "W" in charting. A W-shaped recovery represents the shape of the chart of certain economic measures such as employment, GDP, industrial output, etc. A W-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back to the previous peak, followed again by a sharp decline and ending with another sharp rise. The middle section of the W can represent a significant bear market rally or a recovery that was stifled by an additional economic crisis.
BREAKING DOWN W-Shaped Recovery
A W-shaped recovery generally characterizes a period of extreme volatility compared to other types of recoveries. There are countless other shapes a recession and recovery chart could take, including L-shaped, V-shaped, U-shaped and J-shaped. Each shape represents the general shape of the chart of economic metrics that gauge economic health.
A W-shaped recession begins like a V-shaped recession, but then turns back down again after showing false signs of recovery. W-shaped recessions are also called "double-dip recessions" because the economy drops twice before the 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.
W-Shaped Recovery vs. Other Shapes
A V-Shaped economic recession describes the shape of the market's performance. It begins with a steep fall but then quickly find a bottom, turn back around and move immediately higher (instead of the double-dip of a W-shaped recession and recovery). It is used to measure employment, GDP and industrial output. Many economists use the V-Shape to forecast and analyze a country's health. A V-shaped recession is always mentioned as the 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.
A U-shaped recession begins with a slightly slower decline but then remains at the bottom for an extended period of time before the turnaround starts to happen. The recession from 1971 through 1978, when both unemployment and inflation were high for years, is considered a U-shaped recession.
A L-shaped recession describes a recession that falls quickly and fails to recover. An L-shaped recession is a worst possible recession scenario because there's no hope of recovery. The early 1990s Japanese recession was considered an L-shaped recession.