W-Shaped Recovery

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 then once 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.

Image by Sabrina Jiang © Investopedia 2020

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. A V-shaped recovery is always mentioned as the best-case scenario, given that a recession has occurred. Two notable recessions in history that are considered to be V-shaped are the ones from 1920-21 and 1953-54. Most recession/recovery cycles before the Great Depression and the advent of modern monetary and fiscal policy tended to be V-shaped.

A U-shaped recession is charted like the letter u in visualizations. Unlike the V-shaped recession, this kind of recession may starts off with a more 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 1990 and 1991. GDP rebounded relatively quickly, but the jobs market got stuck in recession. Total employment did not recover until 1993, leading this to be dubbed the Jobless Recovery.

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 large asset bubbles in real estate and the stock market. After raising the rates, these bubbles burst, debt deflation set in, and economic growth plummeted. It took the country over ten years to recover from the crash, which is why that period is called the lost decade.

Article Sources
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  1. National Bureau of Economic Research. "US Business Cycle Expansions and Contractions."

  2. Berkeley Economic Review. "In the Shadow of the Slump" The Depression of 1920-1921."

  3. Federal Reserve Bank of St. Louis. "A Jobless Recovery with More People Working?"

  4. Pew Research Center. "Two Recessions, Two Recoveries."

  5. Brookings Institution. "Japan's Shrinking Economy."

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