Wikipedia Deep Dive

Recession shapes

12 min read

In December 2020, Bloomberg News published a devastating summary of the year: "A great year for Wall Street, but a bear market for humans." That single sentence captures something economists had been watching unfold in real time—a new kind of economic recovery that would earn its own letter of the alphabet.

The top ten percent of Americans own eighty-four percent of the country's stocks. The top one percent own about half. The bottom half of Americans—the ones who had been working the frontlines during the pandemic, stocking shelves and driving delivery trucks—reported owning almost no stocks at all.

When central banks flooded the economy with money to prevent a depression, that money had to go somewhere. It went into asset prices. Stocks soared. Housing prices climbed. Anyone who already owned these things watched their wealth balloon. Everyone else watched from the outside.

This is what economists call a K-shaped recovery. The upper arm of the K represents the fortunate ones, bouncing back quickly, even thriving. The lower arm represents everyone else, sliding further down, taking far longer to recover—if they recover at all. The two groups diverge like the arms of the letter, heading in opposite directions from the same starting point.

The Alphabet of Economic Pain

Economists love their metaphors, and recession shapes have become an informal shorthand for describing how economies fall and rise. There's no official classification system, no academic body that certifies whether a recession qualifies as one letter or another. Instead, the terminology emerged organically from looking at graphs of economic data—particularly Gross Domestic Product, or GDP, which measures the total value of goods and services an economy produces.

Plot GDP over time during a recession, and the line draws a shape. That shape tells a story.

The simplest and most common shape is the V. The economy drops sharply, hits a clear bottom, then rebounds with equal vigor. What goes down comes back up. This is actually the normal pattern for recessions. Economies are resilient. The severity of the decline tends to predict the strength of the recovery—like a rubber band snapping back.

The 1953 recession in the United States drew a textbook V. The Federal Reserve had raised interest rates to fight inflation, and the economy tipped over. GDP shrank by 2.4 percent in the third quarter, then by 6.2 percent in the fourth quarter—a brutal collapse. The first quarter of 1954 saw another 2 percent decline. But then the reversal came. By the end of 1954, the economy was growing at 8 percent, well above its normal pace. The graph traced a sharp valley and an equally sharp ascent.

When Recoveries Lose Their Bounce

Not all recessions are so obliging. Sometimes the economy falls into a hole and can't seem to climb out.

The U-shaped recession is the V's slower, more painful cousin. Instead of a sharp point at the bottom, there's a prolonged trough—what former International Monetary Fund chief economist Simon Johnson memorably compared to a bathtub: "You go in. You stay in. The sides are slippery. Maybe there's some bumpy stuff in the bottom, but you don't come out of the bathtub for a long time."

The United States experienced this in 1973 through 1975. The economy began shrinking in early 1973 and continued declining or barely growing for nearly two years. It bumped along the bottom, stubbornly refusing to recover, before finally climbing out in 1975. Anyone living through it felt the difference from a V—the uncertainty, the false hopes, the grinding duration.

Then there's the W, also known as a double-dip recession. The economy falls, appears to recover, then falls again before finally stabilizing. Two valleys instead of one, with a cruel false spring in between.

The early 1980s in America traced a perfect W. The first recession ran from January to July 1980, with the economy shrinking at an 8 percent annual rate in the spring. Then came what looked like recovery—growth of 8.4 percent in early 1981. But Federal Reserve Chairman Paul Volcker was on a mission to break inflation's back, and he kept raising interest rates. The economy tumbled back into recession from July 1981 to November 1982. Only then did a sustained recovery begin, lasting through most of the decade.

Europe experienced its own W-shaped recession in the early 2010s. Many countries had barely recovered from the 2008 financial crisis when a toxic combination of factors—government austerity, falling investment, high energy prices, and lingering weakness from the Great Recession—pushed them back under. Italy, Spain, Portugal, France, Ireland, Germany, and Cyprus all went through the wringer a second time between 2011 and 2013.

The Shape of Stagnation

The most ominous letter in the recession alphabet is L.

An L-shaped recession is a fall without a real rise. The economy drops sharply, then moves sideways. The steep decline followed by a flat line creates the shape of the letter, and living through one feels exactly as bleak as that image suggests. Years pass. Normal growth never returns. Alternative names for this experience include "depression" and "lost decade."

Japan provides the textbook example. From the end of World War Two through the 1980s, Japan's economy was a miracle—growing robustly year after year, transforming a defeated nation into an industrial powerhouse. Then came the bubble. In the late 1980s, Japanese real estate and stock prices soared to absurd heights. A frequently cited statistic claimed the land under Tokyo's Imperial Palace was worth more than all the real estate in California.

When the bubble burst in 1990, the air went out and never really came back. Japan fell into deflation—a situation where prices actually fall, which sounds nice but is economically devastating. When prices are declining, people delay purchases, businesses delay investments, and the economy stalls. Japan experienced sluggish growth for decades, never returning to anything like its postwar dynamism. Economists called it the Lost Decade, though by now it has stretched into lost decades, plural.

Greece wrote its own chapter in L-shaped misery during its debt crisis from 2007 to 2016. The economy contracted almost continuously for nine years—technically four separate recessions, but they compounded into one long nightmare. By 2017, Greek GDP growth had crawled back to 1.6 percent. An entire generation came of age with unemployment as the norm.

New Shapes for New Crises

When the COVID-19 pandemic shut down the global economy in early 2020, the immediate crash was unlike anything in living memory. The left side of the potential V was vertigo-inducing—the steepest economic decline since the Great Depression, happening in weeks rather than years.

Economists began reaching for new metaphors. Would the recovery trace a normal V, with the right side matching the left? That seemed optimistic given the ongoing uncertainty about the virus. Some proposed a square-root shape—a sharp drop, a partial recovery, then a leveling off at a new, lower normal. Others suggested a Nike swoosh, similar to the square root but with the flat part angling gently upward. By August 2020, the Federal Reserve was predicting a "bumpy" Nike-swoosh recovery.

Financier George Soros had actually proposed this kind of shape back in 2009, calling it an "inverted square root sign." His description was vivid: "You hit bottom and you automatically rebound some—a spike—but then you don't come out of it in a V-shape recovery or anything like that. You settle down. Step down."

But neither the swoosh nor the square root captured what was actually happening. The reality was more troubling.

The Divergence

By late 2020, it had become clear that the pandemic recovery was following two different paths simultaneously.

For some segments of society, the recession was a traditional V. Stock markets had crashed in March and recovered by the summer. Tech companies were thriving as everyone shifted to remote work. Housing prices were climbing as people fled crowded cities for suburban homes. Those with assets and the ability to work from home found themselves, perversely, doing better than before the pandemic.

For others, the recession looked more like an L. Service workers had lost jobs that weren't coming back. Small businesses had closed permanently. The ability to social-distance while working was a luxury that belonged overwhelmingly to the professional class. Those working frontline jobs faced both greater health risks and greater economic precarity.

Draw these two recoveries on the same graph and they form the letter K—two lines diverging from a common point, one heading up and to the right, one heading down and to the right.

The K-shaped recovery became the defining economic story of the pandemic. It crystallized anxieties about inequality that had been building for decades. The response to the crisis—unprecedented central bank intervention, massive asset purchases, near-zero interest rates—had the effect of inflating the value of things that wealthy people already owned.

In January 2021, Edward Luce of the Financial Times issued a warning. Federal Reserve Chairman Jerome Powell's explicit use of asset bubbles to support the economy, and the resulting K-shaped recovery, had widened wealth inequality to levels not seen since the 1920s. "The majority of people are suffering amid a Great Gatsby-style boom at the top," Luce wrote. He worried that this divergence could lead to political and social instability.

What the Shapes Hide

There's something both useful and dangerous about these alphabetic shortcuts. They provide a quick way to communicate the overall character of an economic event. When someone says "L-shaped recession," a listener immediately understands the gravity of the situation—a prolonged period of stagnation, not a temporary dip.

But the letters also flatten complex realities. Every recession affects different groups differently. A V-shaped recovery in the aggregate statistics might hide K-shaped dynamics beneath the surface—some industries booming while others wither, some regions thriving while others hollow out, some demographic groups bouncing back while others sink.

The K-shaped concept was valuable precisely because it made visible a divergence that other shapes obscured. The overall numbers might suggest recovery, but the overall numbers were averaging together very different experiences.

Japan's L-shaped stagnation, for instance, looked different depending on who you were. The lost decades hit young people hardest, creating a generation locked out of the stable employment their parents had enjoyed. Older workers with seniority held onto their positions. A national economic shape contained multitudes of individual trajectories.

The Politics of Shapes

Recession shapes aren't just descriptive—they carry political implications.

When policymakers predict a V-shaped recovery, they're implicitly arguing for patience. The economy will heal itself. Dramatic intervention isn't necessary. When they acknowledge an L-shaped risk, they're building a case for aggressive action. Do something, or we'll be stuck in this pit for a decade.

The W-shape haunted policymakers after the 2008 financial crisis. They remembered how premature tightening in the 1930s had prolonged the Great Depression, and how Paul Volcker's inflation-fighting interest rate hikes had caused the second dip of the early 1980s recession. The fear of a double-dip encouraged them to keep stimulus flowing even as the initial crisis passed.

The K-shape raised different questions entirely. What good is a recovery if half the population doesn't experience it? The aggregate numbers—GDP growth, stock market levels, unemployment rates—might look fine while concealing a society pulling apart at the seams.

Central banks have powerful tools for fighting recessions, but those tools work primarily by influencing asset prices and borrowing costs. That matters a lot if you own assets or run a business. It matters less if you work an hourly job and rent your apartment. The K-shape exposed the limits of monetary policy in addressing inequality—it could pull the overall numbers up while the benefits pooled at the top.

Beyond the Alphabet

The search for the right letter continues. Each new crisis prompts economists to ask whether existing shapes fit or whether a new one is needed. The COVID-19 pandemic alone generated discussions of V, U, W, L, K, square root, Nike swoosh, and even "checkmark" recoveries.

Perhaps the most honest assessment is that these letters are tools for thinking, not precise categories. Economies are vastly complex systems with millions of actors making billions of decisions. No single letter can capture that reality.

But the letters do capture something real about human experience. A V-shaped recession, while painful, at least has the virtue of resolution. You fall, you hit bottom, you climb out. A U-shape tests your patience but eventually ends. A W-shape breaks your heart with false hope before finally delivering. An L-shape can define a generation, warping expectations and eroding confidence in the future.

And a K-shape? A K-shape might be the most unsettling of all—not because the overall economy doesn't recover, but because it reveals that "the economy" is an abstraction. There is no single economy. There are only people, and during a K-shaped recovery, their fates diverge.

The top arm of the K represents those whose wealth came from owning things—stocks, real estate, businesses. The bottom arm represents those whose income came from working. When a crisis hits and central banks respond by flooding the system with money, the value of ownership rises while the value of labor stagnates. The arms of the K spread further apart.

Whether this divergence triggers the political and social instability that observers like Edward Luce warned about remains to be seen. But the K-shape gave that possibility a name, and in naming it, made it easier to discuss. Sometimes that's what a good metaphor does—not solve a problem, but make it visible enough to argue about.