What Is a W-Shaped Recovery?

A W-shaped recovery refers to an economic cycle of recession and recovery that resembles the letter W in charting. A W-shaped recovery represents the shape of the chart of certain economic measures such as employment, gross domestic product (GDP), industrial output, and others.

A W-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back upward, 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.

Key Takeaways

  • A W-shaped recovery is when an economy passes through a recession into recovery and then immediately turns down into another recession. 
  • When charted, major economic performance indicators form the shape of a letter "W" during a W-shaped recession.
  • W-shaped recessions can be particularly painful because the brief recovery that occurs can trick investors into getting back in too early.

Understanding a 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 again after the false recovery.

The United States experienced a W-shaped recovery in the early 1980s. From January to July 1980, the U.S. economy experienced the initial recession, then entered recovery for almost a full year before dropping into a second recession in 1981 to 1982.

W-Shaped Recovery vs. Other Shapes

A V-shaped economic recession describes the shape of the market's performance. This type of recession starts off with a sharp decline, followed by a strong recovery that is generally fairly quick. This is opposed to the double-dip of a W-shaped recession and recovery. As mentioned above, 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. Two recessions in recent history that are considered to be V-shaped are the ones from 1990 and 2001. Both lasted eight months.

A U-shaped recession is charted like the letter "U" in visualizations. Unlike the V-shaped recession, this kind of recession starts off with a slow, gradual drop. Once it hits bottom, it stays there for some time prior to turning around toward recovery. The normal period for this type of recession runs anywhere between 12 and 24 months.

One example of a U-shaped recession is the one between 1981 and 1982. Unemployment peaked at 10.8% and GDP hit 2.7%. Much of this economic activity spilled over from the energy crisis of 1979, as well as tighter monetary policy.

An L-shaped recession, on the other hand, is the worst and most dramatic kind of recession. It is characterized by a sharp, steep decline in economic activity followed by a very slow recovery period—often a decade or more. This is why the L-shaped recession is also referred to as a depression because it takes so long to recover.

Japan underwent a recession in the 1990s after the central bank raised interest rates because of concerns over the rising stock market and real estate values. After raising the rates, the market crashed and economic growth plummeted. It took the country roughly ten years to recover from the crash, which is why that period is called the lost decade.