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U-Shaped Recovery

A form of economic recovery where the recession portion typically lasts for several quarters with a slow return to growth

What is a U-Shaped Recovery?

A U-shaped recovery is a form of economic recovery where the recession portion typically lasts for several quarters with a slow return to growth. It is measured by economic indicators like GDP, inflation, employment levels, and industrial output.

 

U-Shaped Recovery

 

A U-shaped recovery occurs when the economy goes through a recession with a period of stagnation, followed by a rise to the peak. Hence, in a U-shaped recovery, the time spent at the bottom or in stagnation is longer than a V-shaped recovery. According to Simon Johnson, former chief economist of the International Monetary Fund, a U-shaped recovery is like a bathtub where the slides are slippery, and it is difficult to get up from the bottom.

 

Summary

  • A U-shaped recovery is a form of economic recovery where the recession portion typically lasts for several quarters with a slow return to growth. It occurs when the economy goes through a recession with a period of stagnation, followed by a rise to the peak.
  • The depression in the U-shaped recovery lasts for 12-24 months before the economy bounces back. The two important U-shaped recoveries in the U.S. economy happened between 1973-1975 and 1990-1991.
  • A U-shaped recovery is not the best form of recovery, as the economy goes through a period of stagnation. Therefore, a better form of recovery is the V-shaped or Hockey Stick recovery.

 

Understanding U-Shaped Recovery

The depression in a U-shaped recovery lasts for 12-24 months before the economy bounces back. The two important U-shaped recoveries in the U.S. economy happened between 1973-1975 and 1990-1991.

 

The 1973-1975 Stagnation

In 1973, the U.S. economy continued to decline for a period of two years until 1975, with GDP falling by 3% before recovering in the later periods of 1975. The recession was due to the inflationary policies implemented to finance the Vietnam War and the Great Society Welfare state expansion under President Johnson, and deflationary spending policies implemented under President Nixon.

Due to said economic policies, the U.S. dollar weakened against gold. The onset of the recession came along with the 1973 oil crisis and the stock market crash of 1973-1974, resulting in one of the worst economic downturns in the history of the stock market.

It was a difficult road to recovery, with unemployment at an all-time high and a severe recession preventing the economy from entering a state of recovery.

 

The Jobless Recovery: 1990-1991

The U.S. economy entered a state of recovery when the banks in the early 1980s started a commercial and real estate boom through increased lending. The Federal Reserve loosened its monetary policies, which resulted in reduced interest rates and more incentive for people to borrow money to invest.

However, the recovery did not last long as it led to a debt bubble that burst in the late 1980s, resulting in the S&L crisis. The early 1990s was stressful, as unemployment and debt kept rising in the real estate and financial sector.

The turning point came in the mid- and late 1990s when unemployment fell, and GDP levels started to rise. Overall, the recovery was classified as a U-shaped recovery by Keynesian and neoclassical economists.

 

New Peak

In conclusion, a U-shaped recovery is not the best form of recovery, as the economy goes through a period of stagnation. Therefore, a better form of recovery is the V-shaped or Hockey Stick recovery as the economy bounces back faster than any other form of recovery.

Many economists believe that the global economy will experience a U-shaped recovery from the Covid-19 pandemic, as the process towards economic stability is a gradual one.

 

More Resources

CFI offers the Capital Markets & Securities Analyst (CMSA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Economic Indicators
  • GDP Formula
  • Neoclassical Economics
  • International Monetary Fund (IMF)

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