When it comes to economic recovery following a recession, a “V” is much better than a “W” in all cases. Who would have ever thought that the economy could be boiled down to alphabetical representations, but that is exactly what V and W portend. Not sure what I mean? Then read on for your economic primer of the day.
V is for Victory and W is for Woeful. Perhaps not a perfect way to compare two types of economic recoveries, but it is an easy method nonetheless.
V Beats W
Essentially, a V-shaped recovery describes the shape of the market’s performance in a downturn. Going from top to bottom and back to top again, just like the letter V. On the other hand a W-shaped economy describes a market that has plunged, recovered somewhat, but then plunged again before recovery finally takes place. Also known as a double-dip recession, the initial recovery isn’t sustained, sending the economy down a precipice after a brief recovery.
Why are these distinctions important? For a few reasons including: A V-shaped recovery involves hitting bottom and quickly recovering. Essentially, the economy returns to the point where it was previously. A W-shaped recovery offers a similar rebound, but it is cut short as other factors such as increased job loss, national debt, higher taxes and reduced consumer spending short circuit the recovery, leading to a second drop or dip. Eventually, the economy recovers, but the period from when the recession begins until it ends is prolonged due to the secondary drop.
The Obama administration is watching the recovery closely for signs of a double dip. The effects of the federal stimulus package will be wearing off by the end of this year and companies will be done rebuilding inventories which were cut back during the worst of the slump. Also weighing in right now is the effect of higher unemployment, which is expected to pass ten percent this year and government spending which has reached levels never seen previously. Inflation, which has been contained thus far, could re-emerge — a sure sign that the economy is slipping.
Oh, just in case you wonder if “V” and “W” are the only letters used to describe a recession, the letters “U” and “L” are also used. A U-shaped recovery points to a prolonged downturn where the bottom is reached but doesn’t recover right away. Gradually, things improve but not as rapidly as a V-shaped recovery.
Worse, is the L-shaped recession which suggests a sudden sharp drop followed by no recovery, at least for many years. Japan experience an L-shaped recession from the late 1980s until the early years of this century, one that they eventually climbed out of thanks to the internet boom. Still, if you were to chart that recession from its onset to the new millennium, a capital “L” would have been an accurate depiction of what that Asian nation experienced.
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