Not all recessions are the same. Here’s what could happen to the economy and marketsMay 13, 2022
Most agree a recession could start to take shape in the United States over the next few months. The question is what shape that recession will take.
Recessions and recoveries come in shapes and sizes as varied as the alphabet. Perhaps that’s why economists have come to name different kinds of economic downturns after letters.
But predicting which letter will match the situation isn’t quite as easy as ABC. This looming recession is particularly complicated.
“Whether it’s Covid in Asia or what’s going on in Ukraine or what’s going on with energy, it’s one thing after another,” said Nick Tell, CEO of investment bank Armory Group.
The component of this potential downturn that’s unlike others is “the psychological impact on the workforce from Covid and the enormous amount of subsidies that were introduced into the economy,” said Tell. The resulting labor shortage is something that hasn’t been seen outside of a wartime recession.
“When you look at job openings relative to the number of unemployed individuals we’re certainly in uncharted territory here,” agreed David Lebovitz a global market strategist at J.P. Morgan Asset Management. “I’ve never really seen it like this in my lifetime.”
But “components of what’s going on are reminiscent of past recessions,” said Tell.
So if we’re bound for a recession, what form will it take?
“I think we’re going to have a U-shaped recovery, which is one we haven’t seen in a long time,” said Tell.
A U-shaped recession signals a steep decline, with a bit of a long struggle at the bottom before recovery. These are painful recessions that last a year or two and are caused by a number of coinciding factors. The stagflation, oil crisis and stop-and-go Fed response between 1973-75 caused a drawn-out U-shaped recovery.
Simon Johnson, the former chief economist at the International Monetary Fund, compared this type of recession to being stuck in a bathtub. “You go in. You stay in. The sides are slippery. You know, maybe there’s some bumpy stuff in the bottom, but you don’t come out of the bathtub for a long time,” he said.
The economy will need to slow down for a while before the workforce and unemployment return to a normal level, said Tell. When that finally does happen, things will revert back to normal, but it might take a few years.
A V-shape recession is just what it sounds like: A sharp decline with a clear bottom and then a sharp incline. This type of quick and complete recovery is considered a best-case scenario when it comes to recession. Sometimes the fall into recession is steeper than the climb back up towards recovery, like a Nike swoosh.
These usually represent a recovery from recession based on one-time shocks, like the two-month-long 2020 Covid recession.
Lebovitz is hopeful that if there is a recession, it will be V-Shaped and only last a few quarters. One of the things that we always look for and try to gauge is some sort of imbalance,” he said. “There was an imbalance in equity…