1.2. Alphabet Soup The Shape of The COVID-19 Recession - Forbes Advisor

12/24/2020 The Shape of the COVID-19 Recession – Forbes Advisor
Advisor › Investing
Advertiser Disclosure Updated: Jul 15, 2020, 2:21pm
Alphabet Soup: Understanding the Shape of a

COVID-19 Recession
David Rodeck
Contributor
Editorial Note: Forbes may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
Getty
The measures taken by the United States and nations around the world to manage the COVID-19 pandemic—
restricting travel, shuttering nonessential businesses and implementing universal social distancing policies—are
https://www.forbes.com/advisor/investing/covid-19-coronavirus-recession-shape/ 1/15
having severe economic consequences.
On June 8th, the The National Bureau of Economic Research (NBER) officially declared a recession, noting that
the U.S. economy had fallen into contraction starting in February 2020. This marks the first U.S. recession since
the Great Recession, which began in December 2007 and lasted until June 2009.
Today nearly 22 million Americans are receiving unemployment benefits, or about 13% of the labor force. By
some measures, the total number of unemployed could be nearly double that figure. April retail sales fell
nearly 22% year over year, by far the biggest monthly decline in the history of the index. Meanwhile, the Atlanta
Fed’s GDPNow Survey sees the median consensus estimate for second-quarter GDP at -53.8%, which would be
the worst reading in U.S. history.
The duration of the coronavirus recession will only be obvious in hindsight. Past recessions and recoveries have
followed four common shapes: V, U, W and L, where the letters describe the trajectory of GDP, employment
and other key metrics tracking economic conditions.
What is the Shape of a Recession?

The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting
more than a few months, normally visible in real GDP, real income, employment, industrial production, and
wholesale-retail sales.”
Thankfully, recessions do not last forever, and neither will a coronavirus recession. At some point, the economy
will reopen and start growing again, although what the recovery might look like is unclear. Let’s take a look at
how V, U, W and L-shaped recessions compare, and how they might apply to the COVID-19 crisis.
V-Shaped Recession: Steep Decline, Quick Recovery
The best-case scenario for the COVID crisis is a V-shaped recession. If this happens, the economy will rebound
as quickly as it has declined, with minimal long-lasting financial damage. A sharp downturn followed by a quick
rebound in growth defines the V-shaped recession.
Real Gross Domestic Product
4
Percent Change from Preceding Period
-1
-2
-3
-4
Q1 1990 Q2 1990 Q3 1990 Q1 1991 Q2 1991 Q3 1991
1950 1975 2000
Source: U.S. Bureau of Economic Analysis
Customize | Download Data | FRED - Economic Data from the St. Louis Fed
In the early 90s, the U.S. went through a V-shaped recession. The recession lasted only eight months, from July
1990 to March 1991, and the economy started growing again fairly quickly. It was less severe than other recent
recessions, like the oil crisis recession of 1973 to 1975, or the Great Recession.
For the COVID-19 recession to be V-shaped, we would need to set up enough coronavirus testing so that
people could safely go back to work without creating another surge in cases, and effectively treat existing
cases.
In addition, the economic damage must be limited by rapid government intervention to protect jobs and
businesses, plus aid for consumers. More programs like the $1,200 COVID-19 stimulus payment will be needed
to help consumers stay afloat.
Is a V-Shaped Recession Likely?
A V-shaped recession could be possible. Reports suggest that China has their COVID-19 outbreak under
control, and the Chinese economy seems to be rebounding quickly. In the U.S., the federal government has
managed to pass a stimulus package worth over $2 trillion to prop up businesses and consumers during the
crisis.
Some executives are hopeful about the prospects for a V-shaped recession. Around 38% of companies believe
that the recovery will be V-shaped, with the economy rebounding by the third quarter of 2020, according to a
survey from EY.
Dr. Tenpao Lee, Professor of Economics at Niagara University, also believes that V-shaped recovery is possible,
thanks to our globally connected economy.
“Once we are in recovery mode, the recovery will be very fast as global supply chains could be reconnected
instantly,” said Lee.
However, the timing of the recovery depends on how we manage the virus over the next few months.
“If we are able to contain COVID-19 quickly, we will have a V-shaped recession. If we are not able to contain
COVID-19 in the near future, we will have a U-shaped recession,” said Lee.
U-Shaped Recession: Long Period Between Decline and Recovery

In a U-shaped recession, it takes many months, if not years, for the economy to recover. The long, flat stretch
of sideways growth comprises the bottom of the U shape. The Great Recession is a good example of a U-
shared recession. The formal recession itself lasted 19 months, from December 2007 to June 2009, and even
after growth resumed it took years before employment recovered to pre-crisis levels.
5.0
2.5
0.0
-2.5
-5.0
-7.5
-10.0
Q1 2008 Q2 2008 Q3 2008 Q1 2009 Q2 2009 Q3 2009
1950 1975 2000
If COVID-19 causes a longer, U-shaped recovery, that could mean the economy wouldn’t begin recovering until
the end of 2020 or even early 2021. There are a few reasons this could happen. First and foremost, if it takes
longer to get the surge in coronavirus cases under control, it could delay when states and regions can begin
reopening their economies.
In addition, if many businesses end up going bankrupt during the period of economic shutdown or are
otherwise unable to reopen, there will be fewer jobs when the stay-at-home orders end, creating more
economic dislocation. Finally, consumers might not be ready to start spending when things reopen, especially if
they are still scared to go out or they do not get enough financial assistance.
Is a U-Shaped Recession Likely?
EY found that 54% of companies believe that a U-shaped recession is likely. So does Jim Cahn, chief
investment officer from the Wealth Enhancement Group.
“Those arguing for the V-shaped recovery are making two wildly unrealistic assumptions. One, we re-open the
economy pretty much all at once, and two, consumers won’t change their behaviors. For example, they start
going back to bars and baseball games immediately,” he said.
Cahn doesn’t see either happening, which is why he thinks a slow, gradual U-shaped recovery is more likely.
“The economy re-opens at a measured pace, people gradually return to their normal behavior patterns, and
social distancing continues in varying degrees until a vaccine is achieved,” predicted Cahn.
W-Shaped Recession: Quick Recovery, Second Decline

In a W-shaped recession, the economy begins to recover rapidly, but then falls into a second period of decline.
This is also known as a double-dip recession—the two economic declines create the shape of a W.
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
-7.5
-10.0
Q1 1980 Q3 1980 Q1 1981 Q3 1981 Q1 1982 Q3 1982 Q1 1983
1950 1975 2000
The U.S. experienced a W-shaped recession in the early 1980s. After weathering the second oil crisis and
elevated inflation in 1979, the economy fell into a brief recession in 1980, but then rapidly started growing
again. The Federal Reserve was still worried that inflation was too high and raised interest rates to fight it. This
pushed the country back into another recession in July 1981, which lasted until steady long-term growth
resumed in late 1982.
Is a W-Shaped Recession Likely?
Robert Johnson, professor of finance at Creighton University, fears that the COVID-19 crisis could turn into a
W-shaped recession.
“Americans may end social distancing prematurely and that a secondary outbreak of coronavirus could force
another round of social distancing, stalling the recovery,” said Johnson. If this happens, Johnson believes the
recovery could be much longer than most people anticipate—a matter of years, not months, as the country
battles new rounds of infection.
He is also pessimistic about the recent stock market rebound.
“The recent rise in the equity indices appears based more on FOMO (fear of missing out) than on medical
developments for dealing with the pandemic,” he said. Johnson predicts that markets could test previous lows
set in March.
L-Shaped Recession: An Extended Downturn

The worst-case economic scenario for the COVID-19 crisis is that it causes an L-shaped recession — also
referred to often as an L-shaped recovery. In this outcome, growth falls and does not recover for years,
creating the long shape of the L. The official recession may end within a few quarters, but the recovery to a
pre-recession level of economic output may take years.
Japan went through an L-shaped recession in the 1990s. There was a steep market crash at the beginning of
the decade, which was followed by a credit crunch, government missteps and then other economic problems
around the world, including the 1990-91 U.S. recession. The country saw more than 10 years of slow economic
growth, which is known today as Japan’s lost decade.
Is an L-Shaped Recession Likely?
If everything goes wrong in dealing with the COVID-19 crisis, there is the potential for an L-shaped recession.
This could happen if we cannot control coronavirus outbreaks, which would lead to years-long shutdowns and
sluggish growth, if not outright stagnation.
While an L-shaped recession is possible, most experts do not think it will happen. Only 8% of companies
predict that an extended recession, that lasts until 2022 or longer, will happen, according to EY.
Cahn also believes we will avoid the worst.
“I am too optimistic about the world to predict an L-shaped recovery,” he said. Cahn noted that the economy’s
fundamentals remain strong, even now. “Expanding productivity, a well-trained workforce, rule of law, and
efficient capital markets are still intact, which will drive growth long into the future.”
The Steps Needed for a Recovery
If there was a constant theme among the financial experts we spoke to, it was that the country must get the
COVID-19 health crisis under control before it can prepare for any type of economic recovery. The U.S. must
avoid opening the economy too early, as that could lead to another surge in coronavirus cases. Federal and
state governments must heavily invest in more testing to prevent future outbreaks.
If they do, it buys the research community time to develop a vaccine or treatment. At the same time, the
federal government must continue supporting companies with initiatives like the small business loan and grant
programs, so they can survive the shutdown and eventually reopen.
By taking these steps now, the country can limit both the health and economic damage from COVID-19 and
avoid the prospect of an extended downturn.
Sponsored Advertiser Disclosure
COMPARE PERSONAL FINANCE OPTIONS FOR 2020
What is your nancial goal?
Emergency Fund Grow Wealth
Down Payment Education Fund
Retirement Other
1 2 3 Get Started
Smart Financial Decisions Made Simple

Get the Forbes Advisor weekly newsletter for money advice, news and
product reviews from a name you trust.
Enter your email address Subscribe
You may opt out at any time. Terms & Conditions and Privacy Policy
Next Up In Investing
Stimulus Check Calculator: How Much Will You Receive?

Survey: One-Third Of Americans Plan To Use Stimulus Checks To Pay Bills
How To Make A Zero-Based Budget Work During COVID-19
More from
Adjusting Plans, Reﬁning A Niche, Reigniting Enthusiasm: Unafraid Entrepreneurs Innovate in a Changed World
Adjusting Plans, Reﬁning A Niche, Reigniting Enthusiasm: Unafraid Entrepreneurs Innovate in a Changed World
By Forbes Advisor Brand Group
How To Invest In A Startup
How To Invest In A Startup

By Kate Ashford Contributor
How To Invest In Mutual Funds
How To Invest In Mutual Funds

By Kat Tretina Contributor
It’s Time For Your End-Of-Year Investing Checkup
It’s Time For Your End-Of-Year Investing Checkup

By E. Napoletano Contributor
Why Is Bitcoin At All-Time Highs? Where Does It Go From Here?
Why Is Bitcoin At All-Time Highs? Where Does It Go From Here?

By Taylor Tepper Forbes Advisor Staff
December 2020 Fed Meeting: FOMC Ends The Year With Rates Near Zero
December 2020 Fed Meeting: FOMC Ends The Year With Rates Near Zero
Shark Tank’s Kevin O’Leary On How To Build Good Investing Habits
Shark Tank’s Kevin O’Leary On How To Build Good Investing Habits

Forbes adheres to strict editorial integrity standards. To the best of our knowledge, all content is accurate as of the date posted, though offers contained herein may no
longer be available. The opinions expressed are the author’s alone and have not been provided, approved, or otherwise endorsed by our partners.
David
Rodeck
David Rodeck
Contributor
David is a financial writer based out of Delaware. He specializes in making investing, insurance and retirement
planning understandable. Before writing full-time, David worked as a financial advisor and passed the CFP
exam.
First Published: Jun 8, 2020, 4:00am

© 2020 Forbes Media LLC. All Rights Reserved.
AdChoices Privacy Statement Terms and Conditions Contact Us Send Us Feedback Jobs At Forbes Reprints & Permissions
Forbes Press Room Forbes Quote of the Day Advertise

1.2. Alphabet Soup The Shape of The COVID-19 Recession - Forbes Advisor

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1.2. Alphabet Soup The Shape of The COVID-19 Recession - Forbes Advisor

Uploaded by

Copyright:

Available Formats

12/24/2020 The Shape of the COVID-19 Recession – Forbes Advisor

Alphabet Soup: Understanding the Shape of a

having severe economic consequences.

What is the Shape of a Recession?

V-Shaped Recession: Steep Decline, Quick Recovery

Real Gross Domestic Product

1950 1975 2000

Source: U.S. Bureau of Economic Analysis

Is a V-Shaped Recession Likely?

U-Shaped Recession: Long Period Between Decline and Recovery

Real Gross Domestic Product

1950 1975 2000

Source: U.S. Bureau of Economic Analysis

Is a U-Shaped Recession Likely?

W-Shaped Recession: Quick Recovery, Second Decline

Real Gross Domestic Product

1950 1975 2000

Source: U.S. Bureau of Economic Analysis

Is a W-Shaped Recession Likely?

He is also pessimistic about the recent stock market rebound.

L-Shaped Recession: An Extended Downturn

Is an L-Shaped Recession Likely?

Cahn also believes we will avoid the worst.

The Steps Needed for a Recovery

programs, so they can survive the shutdown and eventually reopen.

Sponsored Advertiser Disclosure

COMPARE PERSONAL FINANCE OPTIONS FOR 2020

What is your nancial goal?

Smart Financial Decisions Made Simple

Enter your email address Subscribe

Stimulus Check Calculator: How Much Will You Receive?

How To Invest In A Startup

How To Invest In A Startup

How To Invest In Mutual Funds

How To Invest In Mutual Funds

It’s Time For Your End-Of-Year Investing Checkup

It’s Time For Your End-Of-Year Investing Checkup

Why Is Bitcoin At All-Time Highs? Where Does It Go From Here?

Why Is Bitcoin At All-Time Highs? Where Does It Go From Here?

Shark Tank’s Kevin O’Leary On How To Build Good Investing Habits

Shark Tank’s Kevin O’Leary On How To Build Good Investing Habits

First Published: Jun 8, 2020, 4:00am

You might also like