Economic Recovery Is Starting to Take Shape, but Which One?

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Earlier this week when I was on The Washington Times' nationally syndicated radio show America's Morning News co-hosted by Melanie Morgan and John McCaslin, we talked about how there was more than a fair amount of economic data coming out this week. These data, in my view, are particularly important given the recession eulogy speech delivered in the early part of this week by Federal Reserve Chairman Ben S. Bernanke in which the message was the recession is very likely over.

As Investopedia describes it, a recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade.

What should be pointed out is that the term recession refers to the period of economic contraction and not what happens when the contraction is over. While signs have emerged over the past few months that the contraction has slowed, if not stopped, as depleted inventories are rebuilt, the question that is increasingly being asked is: What kind of recovery lies ahead?

There are several types of recoveries - W-shaped, U-shaped, V-shaped, L-shaped and the much talked about jobless recovery. As one might suspect, the shape of the letter is more or less an indicator as to the trajectory of the recovery.

A V-shaped recovery involves a sharp decline in several economic metrics such as employment and gross domestic product followed by a sharp rise back to their previous peaks. By comparison, a W-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back to the previous peak, followed again by a sharp decline and ending with another sharp rise. The middle section of the W can represent a significant bear market rally or a recovery that was stifled by an additional economic crisis. An L-shaped recovery involves a sharp decline in these metrics followed by a long period of flat or stagnant growth.

Casting aside the letters, a jobless recovery is an economic recovery after a recession when the economy as a whole improves but the unemployment rate remains high or continues to increase over a prolonged period of time. This effect may be a result of cautious businesses that add hours to existing employees in order to increase production capacity rather than hiring new workers.

A jobless recovery occurred in the early 1990s. While the American recession from the late 1980s technically ended in the first quarter of 1991, the unemployment rate did not stabilize until the middle of 1992.

Looking at a chart of the Standard and Poor's 500 Index over the past 12 months, we can see the signs of a V-shaped recovery in the stock market. …