Alphabet Soup or a Double-Dip?
With good reason, so much has been written about the worst economic downturn since the Great Depression. It’s difficult to find someone not directly impacted by this Great Recession, and the sad reality is we continue to labor along this seemingly never-ending, yet hopeful, path to recovery.
I’ve often wondered how many years will pass before this discussion becomes unequivocally past tense. Truth is, no one really knows. Any bettors out there? I think I’ll pass.
Earlier this year, positive economic signs brought long-awaited good news for Americans. Unemployment, albeit a lagging indicator, started to drop, while job growth, consumer spending and consumer confidence rose. Cautious optimism grew, and the “worst-is-over” bandwagon quickly became a hot ticket in Washington and Wall Street.
Then the brakes slammed, as along came April 30th and the end of the Homebuyer Tax Credit program. Since then, home sales and prices have fallen further, leading indicators have waned negative again, and that same bandwagon has a lot more empty seats.
Specifically, Europe’s debt crisis, China’s slowdown, and at home, a tenuous housing market, stubbornly high unemployment, falling stock prices, and the Gulf oil spill, all continue to take a toll on the fragile U.S. recovery.
Economists, who’ve had a long time to consider these circumstances (the National Bureau of Economic Research declared December, 2007 as the official start of the Recession), question whether the signs of recovery which grabbed so much attention just a few months ago, were actually enough to justify a declaration that the recession had ever formally ended.
Consequently, most have said it hasn’t. By textbook standards, there’s no specific academic theory or universal classification system for characterizing recessions and their recoveries. But four definitions (discussed as shapes) have been used by economists to do so for decades.
Given the current climate, talk of these U, V, L and W-shaped recessions have also flourished on the airwaves and the internet. So what do these Alphabet Soup definitions of recession mean? Here’s the recipe:
V-Shaped Recession: The economy suffers a sharp but brief period of economic decline with a clearly defined bottom, followed by a strong recovery. Historically, V-shapes usually last for 8 months or less, and are the typical shape for recessions in the U.S.
Most economists, and politicos in Washington, had hoped for this type of recession this time around, much like those in 1990 and 2001. Obviously, it’s too late for that, as this one has lasted over 2½ years, and at this point, shows little signs of leaving us anytime soon.
U-Shaped Recession: This type takes longer to recover, usually between 12-24 months. Until recently, the consensus among economists appeared to be that the U.S. has been experiencing a U-shaped recession. But since we’re beyond the 30 month point now, and are seeing a downturn after a rather brief upturn, it’s unlikely this one will go down as U-shaped.
Simon Johnson, former Chief Economist for the International Monetary Fund, has said a U-shaped recession is like a bathtub. “You go in, you stay in. The sides are slippery. Maybe there’s some bumpy stuff in the bottom, but you don’t come out of the bathtub for a long time.” Not a bad analogy.
W-Shaped Recession: In what’s become a hot economic and media buzz-term, a “double-dip” recession (or W-shaped), seems to dominate coverage of this topic as the most likely scenario of where things stand today. Here, a sharp downturn is followed by a short period of growth, likely just a few months, only to rather quickly fall back into recession, before eventually reaching full recovery.
The closest the US has been to experiencing a true double-dip was the 3-year span between 1980 and 1982. Many in the field argue this period saw a recession followed by a short period of growth, followed by another recession. But technically speaking, the NBER considered those to be two separate recessions. Regardless, most Americans who lived through it would likely say it felt like a continuous recession. Just as many feel today.
As much as I’ve never really liked ice cream, I definitely don’t want another scoop of that.
The L-Shaped Recession: This is the worse-case scenario for the U.S. economy, and the scenario we all desperately want to avoid. The L-shaped recession would see a sharp, steep recession, followed by several years of virtually no growth. Full economic recovery wouldn’t be seen for a very long time, potentially 7-10 years. The impact would be devastating to millions and take years, if not decades, to erase.
Given how aggressive the US government has been in combating this downturn, it seems unlikely we’ll experience this kind of recession. History tells us that once the nation gets completely through a recession, the U.S. economy has begun a long and extended recovery that has lasted for years.
We’re almost certain to work our way through this, no matter what letter is used to describe it. But for most people continuing to experience the effects of this crisis, it really doesn’t matter at the end of the day. New jobs and improving home values, among other things, will mean much more. Regardless of the exact timing, it’s clear the recovery still has a long way to go.
On second thought, that ice cream may hit the spot after all. And I’ll take rainbow sprinkles too!
Chris can be reached at firstname.lastname@example.org.