What is the Definition of a V-Shaped, U-Shaped and L-Shape Recession?

There are a number of different "types" of recessions.

You can have a V-shaped recession. You can have a U-shaped recession. You can have an L-shaped recession, and you can have a W-shaped recession.

In order to understand these different types of recessions, you need to imagine each letter on a graph. Each letter will represent economic growth (or lack of it) in the four different scenarios.

1. The V-Shaped Recession.

In this scenario, an economy falls into a sharp recession but quickly recovers.

Imagine the left side of the letter V representing an economy falling into recession, while the right side represents its quick recovery.

A V-shaped recession is "sharp and quick". When the current recession started in the United States, many held out hope that it would be a "V-shaped" recession. Unfortunately, this wasn't the case.

2. The W-Shaped Recession.

Also known as a "double-dipped" downturn.

In a W-shaped recession, you would have a sharp downturn which is followed by small, temporary recovery.

After the temporary "blip" in growth, the economy turns lower once again, before it eventually puts in a full recovery.

3. The U-Shaped Recession.

In a V-shaped recession, the economy suffers through a sharp recession but quickly recovers.

In a U-shaped recession, the economy takes a much longer period of time to recover (usually in the neighborhood of 12-24 months) from a sharp recession.

Many believe that the United States is currently experiencing a U-shaped recession right now.

If a V-shaped recession is "sharp and quick", then a U-shaped recession is "long and protracted". Just imagine the letter V and the letter U on a graph and you will start to get the picture.

4. The L-Shaped Recession.

This is the doomsday scenario for the US economy.

Imagine a sharp recession, followed by years of stagnant growth. This is the L-shaped recession, and this is the scenario that the people running the United States desperately want to avoid.

In the L-shaped recession, the economy doesn't begin to recover for an extremely long period of time (think 7-10 years).

The best example of an L-shaped recession is Japan in the 1990s. Their housing and equity markets plummeted, and the country was thrown into a multi-year depression. They experienced the L-shaped recession.

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Given how aggressive the US government has been in combating this current economic downturn, I would say that the possibility of an L-shaped recession is fairly unlikely.

We are almost certainly work out way through a U-shaped recession, and are likely 8-12 months away from seeing a recovery.

Filed under: Stock Market Education

1 COMMENT - What Say You?

Comment by Erik Peterson on October 02, 2009 @ 7:51 pm

I'm sorry but
'Given how aggressive the US government has been in combating this current economic downturn, I would say that the possibility of an L-shaped recession is fairly unlikely.'

Don't you think Japan did the same thing? haha no government WANTS an L-shaped equity market price action.. it just happens..

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