what is v shaped recovery 
v shaped recovery is a type of economic recession and recovery that resembles a v shape in charting specifically a v shaped recovery represents the shape of a chart of economic measures that economists create when examining recessions and recoveries a v shaped recovery involves a sharp rise back to a previous peak after a sharp decline in these metrics understanding v shaped recoveryv shaped recovery is one of the countless shapes a recession and recovery chart could take including l shaped w shaped u shaped and j shaped each type of recovery represents the general shape of the chart of economic metrics that gauge the health of the economy economists develop these charts by examining the relevant measures of economic health such as employment rates gross domestic product gdp and industrial production indexes in a v shaped recovery an economy that has suffered a sharp economic decline experiences a fast and strong rebound such recoveries are generally spurred by a significant shift in economic activity caused by rapid readjustment of consumer demand and business investment spending because of the economy s rapid adjustment and quick recovery in the major metrics of macroeconomic performance a v shaped recovery can be thought of as a best case scenario for an economy in recession 1those interested in learning more about v shaped recoveries and other financial topics may want to consider enrolling in one of the best investing courses currently available historical examples of v shaped recoverytwo periods of recession and recovery in the u s stand out as examples of v shaped recoveries in 1920 the u s entered a steep recession that was feared to have the potential to become a major depression the u s economy was still adjusting from large shifts in government spending industrial activity and inflationary monetary policy that had been directed to the war effort during the world war i it was also reeling from the impact of the spanish flu pandemic of 1918 1920 2by 1919 world war i had ended and more than 1 5 million soldiers returned home from the war flooding the economy with new workers simultaneously the federal government slashed spending by 65 including closing munitions factories that were no longer needed for the war effort the federal reserve s monetary policy didn t help because it hiked the discount rate its main policy tool at the time by 244 basis points or 2 44 interest rates in the economy rose to 7 by mid 1920 as a result the postwar economy of 1920 experienced a decline in production of more than 32 and unemployment surged to 12 as some businesses failed and many others saw a 75 drop in profits the impact on the financial markets was devastating as the dow jones industrial average djia plummeted by 47 that year 3by modern standards the monetary and fiscal policy responses were wholly inadequate to address the deep downturn unemployment insurance as we know it did not yet exist though state and local committees to provide some relief were set up late in the recession the federal government s cut in spending throughout the 1920 recession which would today be called contractionary fiscal policy virtually guaranteed making the recession worse on the monetary policy front the federal reserve increased rates in 1919 and early 1920 which is contractionary because it leads to fewer loans reducing the money supply in the economy the fed then lowered interest rates late as the economy recovered in 1921 and by 1923 interest rates were 3 the 1919 1923 monetary policy would be the reverse of what policymakers would likely do today 4these apparent policy missteps resulted in a sharp v shaped recovery as failing businesses were quickly liquidated and their assets reallocated to new uses businesses and industries prices and wages fell and adjusted to reflect the new structure of production and consumption in the post war post pandemic and increasingly urbanizing society workers found new jobs in the new businesses and industries and the economy quickly recovered and entered a renewed period of expansion known as the roaring twenties as a result the unemployment rate fell to 2 4 and gross national product gnp rose 4 2 per year through 1929 56the recession of 1953 in the u s is another clear example of a v shaped recovery this recession was relatively brief and mild with only a 2 2 decline in gdp and an unemployment rate of 6 1 7 growth began to slow in the third quarter of 1953 but by the fourth quarter of 1954 was back at a pace well above the trend 8 therefore the chart for this recession and recovery would represent a v shape as in 1920 21 an important factor contributing to the quick recovery was the by modern standards wildly inappropriate policy response or rather the lack thereof the fed s monetary policy response was underwhelming with a half percentage point drop in the discount rate and a three quarters point drop in the fed funds rate late in the recession 4 this represents the weakest monetary policy response in the post world war ii era in terms of fiscal policy the federal government took no steps to increase spending and overall tightened fiscal policy during the recession and recovery as measured by the high employment budget surplus an indicator of the direction of fiscal policy popular among economists 9once again a restrained approach to monetary and fiscal policy in the face of recession facilitated the v shaped recovery that followed marring the recovery was the fact that unemployment continued to rise even after the end of the declared recession peaking in september 1954 possibly due to the fed s policy shift to interest rate cuts in 1954 which may have slowed the recovery 10image by sabrina jiang investopedia 2022