*Article updated December 6, 2023*
The causes and nature of a recession can impact how that crisis plays out and how long the recovery will take.
Economists have an informal shorthand of recession shapes to described these rebounds, based on the general shape of the graph each one makes when you plug in factors like GDP, employment rates and industrial output.
Here’s a quick look at some of the different ways recessions come to an end:
V-shaped recovery
A V-shaped recovery is the most typical one and also the best-case outcome when there’s a crisis. It’s marked by a steep economic decline, followed by an equally sharp bounce back. Things return to normal quickly, with a recovery whose strength matches the severity of the downturn.
U-shaped recovery
A U-shaped recovery takes a lot longer than the V shape, with a less clearly defined bottom and improvement timelines. GDP and employment may fall gradually for a few quarters and take several more to show signs of growth. U-shaped recoveries typically last 12 to 24 months, so while it can feel less steep than a V-shaped recession, a U-shaped recovery takes longer to play out.
W-shaped recovery
A W-shaped recovery, much like the letter it’s named after, brings a double dip. It begins like a V-shaped recovery, but then turns back down, so the economy actually drops twice before fully recovering. These are often tricky for investors because the first recovery can make them think things are getting back to normal, only to be hit by another downturn.
L-shaped recovery
The L-shaped recovery is the ones economists fear most, because it’s both a steep decline and a slow recovery period. It’s the most dramatic type of recession and the longest lasting – typically up to a decade. The right-hand side of the letter L never actually goes back up, bringing the economy into depression territory.
Swoosh/K-shaped recovery
This nascent recession-recovery type emerged during the COVID-19 crisis when no other fit. Named after the Nike “swoosh”, this shape sees business activity and spending slowly come back online amid planned careful easing of pandemic limits. Growth is slow and flatlines before returning to previous levels.
This morphed into a K-shaped recovery as the recession more heavily affected certain industries and communities. The K-shaped recovery became the more likely and relevant scenario, unless appropriate and widely-differing amounts of economic stimulus could be targeted to the right people and areas. Think about the divergent paths of gyms and restaurants versus home office furniture and online conferencing services – there’s your K!
