Table of Contents
- What Is a U-Shaped Recovery?
- Key Takeaways
- Understanding U-Shaped Recoveries
- Other Common Recession Shapes
- Examples of U-Shaped Recessions
- 1973–1975: Nixonomics, the Gold Window, and Stagflation
- 1990–1991: The Jobless Recovery
- Was the COVID Recession U-Shaped?
- How Is a U-Shaped Recession Different From a V-Shaped Recession?
- How Long Do Recessions Usually Last?
- The Bottom Line
What Is a U-Shaped Recovery?
Let me explain what a U-shaped recovery means in economic terms. It's a pattern where the economy goes through a recession with a sharp drop in key indicators like employment, GDP, and industrial output, then hits a phase of stagnation instead of a clear bottom, and finally climbs back gradually to its previous high point.
You can visualize this as the letter U on a chart: the economy falls steeply, levels out for a while in a trough, and then rises slowly. This happens when there's no quick bounce back after the decline; instead, things stay flat for several quarters before improving.
Key Takeaways
When you chart major economic measures during a U-shaped recovery, they form the shape of a U. This occurs after a recession where the economy doesn't rebound right away but lingers at low levels for a few quarters.
It's like a V-shaped recovery, but with a longer time spent at the bottom rather than an immediate upturn. Think of examples such as the 1973-1975 recession under Nixon or the 1990-1991 one after the savings and loan crisis.
Understanding U-Shaped Recoveries
A U-shaped recovery charts out with a steep fall in metrics like employment, GDP, and output, followed by a prolonged trough and then a steady climb back. The downturn here is typically deeper and lasts longer than in a V-shaped scenario.
Economists break it down into three stages: the initial recessionary drop, the trough where things stagnate, and the slower recovery phase. Early on, you might think the worst is over, but if recovery drags, the impact can be more severe than expected.
As the recession continues, businesses struggle with bills and some go bankrupt. In the recovery, banks hold back on loans, consumers wait for positive signs before spending, and unemployment rises because jobs aren't added quickly. Spending drives the economy, but it takes time for confidence to return.
By contrast, a V-shaped recovery hits the bottom and bounces back in weeks or months, not lingering like the U shape.
Other Common Recession Shapes
Economists use shapes like U, V, W, L, and K to describe recession patterns. A V-shaped one drops steeply but recovers fast, which is ideal.
A W-shaped recession starts like a V but dips again in a false recovery, known as a double-dip. An L-shaped is the worst, with a quick fall and no recovery for a long time. A K-shaped has uneven recovery, where some sectors thrive while others suffer.
Examples of U-Shaped Recessions
Since 1945, about half of U.S. recessions have been U-shaped, including the 1973-1975 and 1990-1991 ones.
1973–1975: Nixonomics, the Gold Window, and Stagflation
One clear U-shaped example is the 1973-1975 recession. The economy shrank starting in early 1973, with GDP dropping 3% at its lowest, and it took two years of decline or minimal growth before recovering in 1975.
This stemmed from inflationary policies funding the Vietnam War and Great Society programs, plus Nixon's deficit spending and the end of the dollar's gold link. Key triggers were the 1973 oil crisis, rising oil prices, and the 1973-1974 stock market crash.
Recovery brought high unemployment and accelerating inflation, defining the 1970s as a stagflation era.
1990–1991: The Jobless Recovery
Another example is the 1990-1991 recession from the savings and loan crisis. Deregulation in the 1980s led to a real estate lending boom, which burst in the late 1980s with massive losses and bank failures.
The broader economy recessed in mid-1990, with mild GDP growth returning in 1991, but jobs kept declining until mid-1992, and full employment recovery took until 1993. That's why it's called the jobless recovery, fitting the U shape.
Was the COVID Recession U-Shaped?
Many economists see the COVID-19 downturn as K-shaped, with sectors like travel and hospitality suffering while others like online streaming grew.
How Is a U-Shaped Recession Different From a V-Shaped Recession?
Both U and V shapes have a sharp decline and symmetrical recovery, but the key difference is the trough duration: V rebounds quickly, while U stays depressed longer.
How Long Do Recessions Usually Last?
From 1857, the U.S. has had 34 recessions lasting from two months to over five years. Since 1980, the average has been under 10 months in six cases.
The Bottom Line
A U-shaped recession starts with a drop in output, followed by extended decline and then a slow expansion. It's often tough to know if you've hit bottom or if things will worsen before improving.
Other articles for you
A haircut in finance refers to a reduction in an asset's value, often applied to collateral in loans or in market maker spreads to manage risk.
Unfair claims practice occurs when insurers improperly avoid, delay, or reduce valid claims to minimize costs, which is illegal in many jurisdictions.
The Bretton Woods Agreement established a post-WWII international monetary system pegging currencies to the U.S
Warehouse financing allows businesses to secure loans using their inventory as collateral stored in a warehouse.
A chattel mortgage is a loan for purchasing movable personal property like manufactured homes or equipment, where the lender holds ownership until the loan is paid off.
A tobacco tax is a government-imposed levy on tobacco products intended to reduce use and fund healthcare, though it often generates revenue with minimal impact on consumption.
Omega measures the leverage in options by calculating the percentage change in an option's value relative to the percentage change in the underlying asset's price.
Health insurance is a contract that covers medical costs in exchange for premiums, with various types and federal options in the US.
A cash balance pension plan is a defined-benefit retirement plan where employers credit employee accounts with a percentage of salary plus interest, bearing all investment risks.
International investing involves buying securities from outside your home country to diversify portfolios and manage risks.