The Economy Is Going To “L”

The differences between an economic recession and a depression are typically a matter of duration and amount of (that is, lack of) economic activity.

Categories

Recessions can also be categorized.  There are four types of recession that are referred to by analysts and they are as follows: V, W, U and L.  The letters refer to pictorial representations that would be seen on a graph of activity and time.

V Type

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The V recession is one where activity drops drastically, but quickly recovers, the left arm of the V being the drop, and the right arm, the recovery. While unpleasant, they are short-lived.  Everybody on Wall street hoped that the current economic downturn would be a V type recession.

W Type

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The W recession is sometimes referred to as a “double-dipped” one, where there is a violent drop in economic activity, a strong and quick recovery and then another equally (or worse) drop but followed by a slightly slower recovery.

U Type

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The U recession is what most analysts are saying we are currently experiencing, whereby there is a sharp drop which gradually gets worse, bottoms-out and then recovers quite dramatically, back up to the levels that it enjoyed before its descent.  Therefore, market analysts who believe this think that the “recession” will be over at the end of 2010.

L Type

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The L recession really describes a depression, characterized by a steep decline in economic activity, followed by a prolonged period, sometimes several years, of little or no growth.

While it is easy to think of the Dow Jones Industrial Average (or S&P 500, or NASDAQ) as little more than reflections of what an economy is doing, they really aren’t as closely related as most people think.

A single stock price, and indeed an entire index (Dow Jones, S&P etc.) can be rising very quickly, while the economy itself is in sharp decline.  Don’t make the same mistake that so many other people make.

Just keep in mind, that while unemployment continues to worsen, there can be NO economic recovery.  For a country to truly prosper, among other things, it needs people in employment, supplying products and services to each other AND to other countries.

Luke.