Most agree that the recession may begin to take shape in the United States in the next few months. The question is what form this recession will take.
Recessions and recovery come in shapes and sizes different from the alphabet. Maybe that’s why economists have started calling different types of economic downturns after letters.
But predicting which letter will correspond to the situation is not as easy as ABC. This impending recession is particularly complex.
“Whether it’s Covid in Asia or what’s happening in Ukraine, or what’s going on with energy, it’s one thing after another,” said Nick Tell, chief executive of Armory Group.
The component of this potential decline, which is different from the others, is “the psychological impact on the Covid workforce and the huge amount of subsidies that have been introduced into the economy,” Tel said. The resulting labor shortage is something that has not been observed outside the recession during the war.
“When you look at job vacancies relative to the number of unemployed, we’re certainly in unexplored territory here,” agreed David Lebowitz, global market strategist at JP Morgan Asset Management. “I’ve never seen him like that in my life.”
But “the components of what’s happening are reminiscent of past recessions,” Tel said.
So, if we are bound by a recession, what form will it take?
U-shaped
“I think we’re going to have a U-shaped recovery that we haven’t seen in a long time,” Tel said.
The U-shaped recession signals a sharp decline, with a slightly long struggle at the bottom before recovery. These are painful recessions that last a year or two and are caused by a number of concomitant factors. Stagflation, the oil crisis, and the Fed’s response between 1973 and 75 caused a prolonged U-shaped recovery.
Simon Johnson, the former chief economist at the International Monetary Fund, compared this type of recession to staying in the bathtub. “You go in. You stay inside. The sides are slippery. You know, there may be some bumps in the bottom, but you don’t get out of the tub for a long time,” he said.
The economy will have to slow down for some time before labor and unemployment return to normal, Tel said. When this finally happens, things will return to normal, but it may take several years.
V-shaped
The V-shaped recession is exactly what it sounds like: a sharp drop with a clear bottom and then a sharp slope. This type of fast and complete recovery is considered the best scenario when it comes to a recession. Sometimes falling into recession is steeper than climbing back to recovery, like playing Nike.
They typically represent a recovery from a recession based on one-off shocks, such as Covid’s two-month recession in 2020.
Lebowitz hopes that if there is a recession, it will be V-shaped and will last only a few quarters. One of the things we are always looking for and trying to assess is some imbalance, “he said.” There was an imbalance in equity estimates during the technology bubble and an imbalance in housing on the eve of the 2008 financial crisis. Looking at today’s economy , we do not see significant imbalances that would lead to a serious downturn in the economy. “The next recession, Lebowitz said, will be relatively mild.
Lebowitz advises investors to continue the course for the next 12 to 18 months. “We don’t offer to sell when you’re down 20%,” he said. However, investors should see this as an opportunity to rebalance their portfolios and make sure their wider house is in order.
W-shaped
The terrible double recession. This happens when the economy goes from recession to recovery and then falls back into a new recession. W-shaped recovery is especially painful for investors who jump back to what they see as a restored market before falling to another bottom.
In 1980, the economy experienced a brief six-month recession and recovery, followed by a 16-month slump that lasted only from mid-1981 to late 1982. If the Federal Reserve is not aggressive enough to raise interest rates, some analysts say , this may happen again.
L-shaped
The L-shaped recession or “hockey stick” is what economists want to avoid at all costs. This means a decline in growth for a very long time, and we often crawl from the territory of the word ‘R’ to the territory of the word ‘D’: depression. This usually means that a large number of workers remain unemployed for significant periods of time and that capital goods do not work.
The Great Depression of the 1930s was L-shaped, and some economists say the Great Recession of the late 2000s was the same, it took six years after the crisis to return GDP to 2007 levels. Some called it “barbecue recovery”: low and slow.
K-shaped
K-shaped recovery is what happens when individual communities recover from economic downturns at different rates. Some sectors of society may experience renewed growth, while others continue to lag behind.
These changes are usually determined by industrial, wealth and geographical disparities and are exacerbated by increased income levels and wealth inequality.
While the recovery from the recession in 2020 can be described as V-shaped, many point out that it was in fact bilateral. Black and low-income Latin American families saw the fastest depletion of their savings during the pandemic, for example. Many white-collar workers quickly recovered from the 2020 recession as the government distributed stimulus payments and stock and housing prices rose. Those who have no savings and who have worked in the services continue to suffer. The lowest paid employees were most likely to lose their jobs in almost every sector of the economy between 2020 and 2021, according to the Bureau of Labor Statistics.
“Low-wage establishments and low-income workers have borne the brunt of the recession caused by the coronavirus pandemic,” wrote BLS economists. “The lowest-paid establishments and the lowest-paid workers saw the sharpest initial decline in employment at the start of the recession and experienced the slowest subsequent recovery in employment.”
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