What Is a U-Shaped Recovery?

A U-shaped recovery is a type of economic recession and recovery that resembles a U shape when charted. A U-shaped recovery represents the shape of the chart of certain economic measures, such as employment, gross domestic product (GDP), and industrial output.

The U shape occurs when the economy experiences a sharp decline in these metrics without a clearly defined trough, but instead a period of stagnation followed by a relatively healthy rise back to its previous peak. A U-shaped recovery is similar to a V-shaped recovery, except that the economy spends a longer time slogging along the bottom of the recession rather than immediately rebounding.

Understanding U-Shaped Recovery

A U-shaped recovery describes a type of economic recession and recovery that charts a U shape, established when certain metrics such as employment, GDP, and industrial output sharply decline and then remain depressed typically over a period of 12 to 24 months before they bounce back again. A U-shaped rescission features a steep decline in economic output followed by a relatively longer trough than a V-shaped recession, followed by a longer recovery out of that trough. The downturn here is usually deeper and longer than that of a V-shaped recession.

In the early stages of a U shape, economists may wrongly assume that the worst is over and the economy has bottomed out. However, the longer it takes to recover, the more likely the setback will be more severe than originally anticipated. As the recession drags on, companies experience more trouble in paying their bills, and some may have to declare bankruptcy.

During the recovery period, banks are typically reluctant to lend more money to firms, and consumers do not spend freely until they see signs that the economy is recovering, once again increasing consumer confidence. Although spending is a key driver of the economy, it takes time for consumers to feel comfortable again about spending their money. Businesses must wait for the economic climate to improve before bringing on additional workers. With fewer jobs available, unemployment tends to increase during such recovery periods.

Meanwhile, a V-shaped recovery may reach the same trough but quickly rebound in a matter of weeks or a few months, rather than dragging out for a year or more.

Other Common Recession Shapes

Recession shapes are shorthand concepts used by economists to characterize various types of recessions. Any number of recession and recovery types may conceivably be charted, although the most common shapes include U-shaped, V-shaped, W-shaped, and L-shaped.

• V-shaped recessions begin with a steep fall, but they hit their trough and recover quickly. This type of recession tends to be considered a best-case scenario.
• W-shaped recessions begin like V-shaped recessions, but turn down again after false signs of recovery are exhibited. These are also known as double-dip recessions, because the economy drops twice before full recovery.
• L-shaped recessions are worst-case scenarios, describing recessions that fall quickly but fail to recover.
• K-shaped recessions see an uneven recovery, as some sectors come back quickly while others lag.

Examples of U-Shaped Recessions

Of the U.S. recessions charted since 1945, approximately half have been described by economists as U-shaped, including the 1973–75 recession and the 1990–91 recession.

1973–1975: Nixonomics, the Gold Window, and Stagflation

One of the most notable U-shaped recessions in U.S. history was the 1973–75 recession. The economy began to shrink in early 1973 and continued to decline or show only slight growth over the next two years, with the GDP dipping 3% at its deepest point before finally recovering in 1975.

The roots of this recession lay in the inflationary policies of the preceding years, simultaneously financing the Vietnam War and the Great Society welfare state expansion under President Lyndon Johnson, Keynesian deficit spending policies under President Richard Nixon after him, and the resulting break of the last links between the U.S. dollar and gold.

The onset of the recession was marked by:

• The 1973 oil crisis and increased oil prices
• The 1973–74 stock market crash, one of the worst stock market downturns in modern history, which affected all the major stock markets in the world

The recovery was marked by persistently high unemployment and accelerating inflation which would characterize the 1970s as the era of stagflation.

1990–1991: The Jobless Recovery

The deregulation of banks and savings & loans (S&L) in the early 1980s kicked off a boom in commercial and residential real estate lending that really took off as the Federal Reserve loosened monetary policy and interest rates fell after the economy emerged from recession in 1982. This boom would build into a debt bubble of risky mortgages and shady banking practices that burst in the late 1980s in a debacle known as the S&L crisis.

The resulting massive losses, debt deflation, and bank failures across the real estate and financial sector led to recession for the broader economy in mid-1990. Although mild GDP growth reappeared the following year, job losses continued and unemployment rose through mid-1992, and total employment did not regain its pre-recession level until 1993. Because of this, the recovery from the 1990–91 recession has been dubbed the Jobless Recovery, and it can be considered an example of a U-shaped recovery.

The Bottom Line

A U-shaped recession and recovery is characterized by an initial drop in economic output followed by an extended period of decline and then a slower but eventual economic expansion. In the case of a U shape, it is sometimes hard to tell if the economy has bottomed out or if things will get worse before they get better. Economists tend to categorize U shapes into three stages: the recessionary part of the downturn, the economic trough, and the slower but more lasting economic recovery.