Anyone who has been in business for more than a half dozen years has been through economic cycles before and knows that eventually the economy will turn positive (or negative depending on what point in time we are looking at). But what are we to make of the Great Recession we are currently clawing our way through?
As any economist will tell you, ask ten of them their opinion on the economy and you will get eleven different responses. No one seems to be able to put their finger on the current state of the economy and there is growing concern that this recession is going to linger for some time.
Are we in a V-shaped curve, a U-shaped curve, a W-shaped curve or the dreaded L-shaped curve?
The most common shape for a recession is the V-shape where the economy suffers a sharp decline followed by a snap back into a strong recovery. With two+ years of economic morass we seem to have blown through the V.
Hopefully we are experiencing a U-shaped recession which is longer than a V-shape and has less of a clearly defined trough. The recession of 1973-1975 was a U-shape where we bumped along the bottom for an extended period before experiencing a sustained growth trend that pulled the economy out of its doldrums.
In a W-shaped recession, the economy gives a head fake showing signs of recovery and growth for a short period only to falter and dip back into recession. This is often triggered by overzealous monetary policy such as when the Fed led by Paul Volcker aggressively raised interest rates in 1981 to stave off inflation only to have the US economy drop back into recession forming a double dip or W-shaped recessionary period. There is some evidence that we are currently experiencing that double dip effect.
An L-shaped recession occurs when an economy has a sustained recession and does not return to typical trend line growth for many years. The classic example of the L-shape is Japan in the 1990’s after its asset price bubble burst. Coming off of an extended period of growth for several decades, the Japanese economy imploded and experienced what many economists call the lost decade. Some would argue that Japan has still not recovered fully from that downturn and is now an also-ran in the global economy instead of the budding superpower they seemed to be developing into.
With the US economy sinking into its current state after a similar asset price bubble in the housing market, many economists fear that we are in for a prolonged state of low growth even after we have officially recovered from the recession. The Obama administration seems to have fired all of its stimulus bullets and the rest of the world is following the US down the economic rabbit hole. We may be in for a long, slow L-shaped recovery as we continue this painful ride on the economic rollercoaster.
Like every economic cycle in history, we will not know the whole story until several years from now when we can safely review this period with hindsight. Hopefully, the few bright spots we have witnessed over the last couple of months will serve as the catalysts the economy is looking for to lead us back to economic growth and prosperity.