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U-Shape vs W-Shape Recovery

recovery recession

The road to recovery has been tough. From enormous unemployment numbers to the fall of the residential real estate markets, many believe and feel like we still haven’t bounced out of the “Great Recession” that started in 2007. The truth however is that we have gotten out of the recession late last year, but its impact is still felt across the board. So when will it get better?

There are two theories out there about where we are heading as a country. The first is the U-Shaped Recovery which indicates that we have declined as much as we are going to, will stabilize for about a year and then enjoy a modest recovery prior to the next boom. This theory is possible and very likely if:

  • Consumer spending remains neutral or positive
  • Commercial real estate market doesn’t collapse
  • Housing market doesn’t take another dive
  • Inflation is controlled

On the other hand, the next scenario revolves around a W-Shaped Recovery, which indicates that the country could be faced with another recession in the later half of 2010. The real question that remains is how bad will it be?

Here are some indicators to look for within the next 3-6 months.

  • Unemployment exceeding 10.3%
  • Mortgage rates (30 yr fixed) falling below 4.75%
  • Foreclosure rates to exceed 2009 actuals

Those are 3 indicators that would prove that the US is indeed entering into another recession; keep a close eye on this.

economic recovery

What happens if we do go in another recession?

It depends on how bad it is, if this next (potential) recession takes us below 2009’s awful lows, then we might be faced with deflationary experience, similar to the one in Japan, which they still haven’t escaped from since 1990. The US treasury will do its best to prevent this, as they have learned much from Japan’s mistakes but will they be able to reverse the effects rather than delay them. We are faced with very large expenses like Healthcare, Bailouts and Defense without even including what we have already put ourselves in debt for during the last recession, so the cost of saving us might actually doom us…