Most agree that a recession could begin to take shape in the United States in the coming months. The question is what form that recession will take.
Recessions and recoveries come in shapes and sizes as varied as the alphabet. Perhaps that is why economists have come to name different types of economic downturns with letters.
But predicting which letter will match the situation is not as easy as ABC. This looming recession is particularly tricky.
“Whether it’s Covid in Asia or what’s going on in Ukraine or what’s going on with energy, it’s one thing after another,” said Nick Tell, chief executive of investment bank Armory Group.
The component of this potential recession that is different than others is “the psychological impact on the workforce from Covid and the massive amount of subsidies that have been fed into the economy,” Tell said. The resulting labor shortage is something not seen outside of a wartime recession.
“When you look at job openings relative to the number of unemployed people, we’re certainly in uncharted territory here,” agreed David Lebovitz, global market strategist at JP Morgan Asset Management. “I’ve never really seen him like this in my life.”
But “the components of what’s going on are reminiscent of past recessions,” Tell said.
So if we are destined for a recession, what form will it take?
“I think we’re going to have a U-shaped recovery, which we haven’t seen in a long time,” Tell said.
A U-shaped recession indicates a sharp decline, with a long struggle at the bottom before recovery. These are painful recessions that last a year or two and are caused by a number of coincidental factors. Stagflation, the oil shock, and the Fed’s intermittent response between 1973 and 1975 caused a prolonged U-shaped recovery.
Simon Johnson, a former chief economist at the International Monetary Fund, likened this kind of recession to being stuck in a bathtub. “You go in. You stay in. The sides are slippery. There may be some lumps on the bottom, but you don’t get out of the tub for very long,” he said.
The economy will need to slow down for a while before the workforce and unemployment return to a normal level, Tell said. When that finally happens, things will go back to normal, but it may be a few years.
A V-shaped recession is exactly what it sounds like: a sharp drop with a clear bottom, then a sharp dip. This type of quick and complete recovery is considered the best case scenario when it comes to a recession. Sometimes the dip in recession is steeper than the rise in recovery, like a Nike Swoosh.
These generally represent a recession recovery based on one-off shocks, such as the two-month-long Covid 2020 recession.
Lebovitz is hopeful that if there is a recession, it will be V-shaped and only last a few quarters. One of the things we always look for and try to measure is some kind of imbalance,” he said. “There was an imbalance in stock valuations during the tech bubble, and an imbalance in housing in the run-up to the financial crisis of 2008. Looking at the economy today, we don’t see any significant imbalances leading to a serious downturn in the economy.” The next downturn, Lebovitz said, will be relatively mild.
Lebovitz recommends that investors stay the course for the next 12 to 18 months. “We don’t suggest selling when you’re already down 20%,” he said. Still, investors should take this as an opportunity to rebalance their portfolios and make sure their overall house is in order.
The dreaded double dip recession. This occurs when an economy goes from a recession to a recovery and then falls back into another recession. A W-shaped rally is particularly painful for investors who return to what they think is a recovering market before plummeting to another bottom.
In 1980, the economy had a brief six-month recession and recovery followed by a 16-month recession that lasted from mid-1981 to late 1982. If the Federal Reserve is not aggressive enough to raise interest rates, say some analysts, this could happen again.
An L-shaped or “hockey stick” recession is what economists want to avoid at all costs. It means a plunge into growth for a long time, and we often go out of the ‘R’ word territory into the ‘D’ word territory: Depression. It usually means that large numbers of workers are unemployed for significant periods of time and capital assets are sitting idle.
The Great Depression of the 1930s was ‘L’ shaped, and some economists argue that the Great Recession of the late 2000s was the same, it took six years after the crisis for GDP to return to levels of 2007. Some called it a “barbecue comeback”: low and slow.
A K-shaped recovery is what happens when separate communities recover from economic downturns at varying rates. Some sectors of society may experience renewed growth while others continue to lag behind.
These changes are generally defined by industrial, wealth, and geographic differences and are exacerbated by higher rates of income and wealth inequality.
“Establishments with the lowest median wages and lowest-earning workers have been hardest hit by the coronavirus pandemic-induced recession,” BLS economists wrote. “Lowest-wage establishments and lowest-wage workers experienced the steepest initial declines in employment at the start of the recession and experienced the slowest subsequent recovery in employment.”