Economists tracking recessions through the years have discovered that, despite their destructive and seemingly chaotic repercussions, recessions do tend to show patterns of behavior. These patterns are often represented with letters of the alphabet.
A V-shaped recession indicates a steep economic downturn, and an equally quick recovery. It is the best-case-scenario recession, and was last seen in the mid-1950s.
An L-shaped recession sees the same steepness of downturn, but the economy stagnates and recovery is slow. Sometimes, as was the case in the 1990s Japanese recession, these recessions are decades long.
A W-shaped recession features a “false recovery”, with the economy going on a minor downward rollercoaster ride before settling into true recovery.
A U-shaped recession is similar to a V-shaped recession, but with a vague bottom and a less vigorous recovery. The past recessions of the mid-80s, the mid-90s and the 2002 period are examples of U-shaped recessions.
In light of the recent announcement about a growing gross domestic product (GDP), the issue lies with figuring out which letter-type of recession we are going through, in order to best chart a direction for recovery.
The recent bounces in both the GDP and the real estate market will eventually flat-line since both these items are heavily dependent on consumer spending and government supports (respectively). Neither of these factors is sustainable in the face of the current joblessness rates and employers’ continuing reluctance to hire. Without a job, people can neither afford to buy consumer goods nor keep up on their rent or monthly mortgage payments.
The lack of readily available jobs will stall the economy’s recovery as there will be fewer tenants to rent and buyers to buy homes, and less consumer spending power. Those with existing jobs and homes will be less likely to spend as they cautiously wait for the certainty of continued employment and confidence that the government is handling the recovery effort satisfactorily.
For a list of the factors affecting the real estate recovery, see our article “The Economic Restructuring of Real Estate”. Throughout the coming months, we will be adding commentary to this list so that you, as brokers and agents, stay informed during the coming recovery, whatever its shape.
Re: “The Shape of a Recession” from The New York Times