First, there is the "traditional" V shaped recovery. This has been the pattern seen in past recessions. Growth occurs almost as quickly as it slowed down. Credit markets recovery rapidly, followed by a mix of business & consumer expansion. Consumer confidence, employment, and markets follow suit, sustained by increased spending and higher returns on capital.
A variant on this is the U shaped recovery. Here, growth takes longer to materialize. High unemployment rates, credit restrictions, and uncertain returns on capital all act to restrain spending by businesses and consumers. Consumer confidence remains edgy and markets act erratically as investor anxiety works itself out. Eventually, housing and credit markets rebalance themselves, restoring confidence in smaller, incremental steps. Eventually, an upward trend materializes as inventories are replenished and consumers shift cash from savings to consumption. Unemployment rates gradually ebb downward as investment spending picks up, supporting more attractive capital returns.
An L shaped recovery is more of a "nightmare" scenario. This is what happened to the Japanese economy during the 1990's. Unbalanced housing and credit markets never truly recover. Consumers and businesses, burdened by illiquid debt, increasingly conserve cash to stay afloat. Unemployment remains high as a result, fueling a reinforcing cycle of increased savings and fear. Spending dries up as does any appetite for investment risk. With depressed capital returns, businesses have no incentive to step up output. So, output continues to fall and interest rate actions have no further effect. Fiscal spending eventually peters out, with no sustained momentum. Panic becomes the norm in markets as desperation selling continues out of the need to constantly raise cash for operations. Job losses are structurally permanent.
W and M shapes are variants of the "double dip" pattern of a multi-year recession scenario. Here, fiscal and monetary actions stimulate the economy enough to have a measurable effect, but mostly short term. Liquidity is eased to a high enough degree to allow some growth in consumer and business economic output, but it is not sustainable. Intermittent market rallies spark a roller coaster ride of fear and enthusiasm. Eventually, doubt replaces optimism and there are cutbacks to spending and investment. However, there is some rebalancing of debt load among banks, consumers, and businesses. This allows a more sustainable recovery cycle to occur. Its strength determines if the long term outlook is more favorable then when all the trouble starts. If so, the shape is a W; if not, it becomes a M, implying the economy is lower at the end than it was at the beginning. This becomes a long term contraction.
As of today, a poll of the topic on LinkedIn reveals:
• V shaped: 8%
• U shaped: 48%
• L shaped: 17%
• W shaped: 18%
• M shaped: 7%.
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