What Is the Shape Of This Cycle As A Letter: V, L, W, J, U, Or Maybe A Lazy J or Wiggly W?

For some time now it has become commonplace for people to describe business cycles by how they resemble one letter or another, although obviously this amounts to a lot of hand waving. But it does provide bright images.  Thus Trump and crew seem to believe that the US will experience a V recovery, one that will boom up as rapidly as it fell down, so the sooner we can reopen America the sooner he can get that boomy upturn to guarantee his reelection. Somehow he fails to understand that if he gets it going too soon, the uptrun is more likely to get sideswiped by a serious Second Wave of the coronovirus that would turn the upturn back into a downturn, making it into a W, or if, as I suspect, given that the downturn we have just seen pushing the unemployment rate upo 10% in two months is truly unprecedented so that the upturn will not be all that fast, the outcome will not be a neat W, but a Wiggly W.

Use of letters is recent, but debates on the shapes of macro fluctuations is very old, dating back into the 19th century.  Up until the 1930s, nearly all the discussion focused on “commercial crises” generating sharp downturns that then were asymmetrically followed by slower upturns.  This was still the view in 1913 when Wesley Clair Mitchell of the NBER and Columbia published his Business Cycles, coining that term.  I have been recently over on Econbrowser taken to describing such a pattern as a “Lazy J.”  Think of a J but then tilt it to the right so its upslope gets flatter until it is flatter than the downturn.  I think this is what we are going to see now in the US, although it could turn into a Wiggly W.

In the 1930s, driven by Mitchell associated at the NBER, it became common to use sine curves to describe business cycles, so symmetric, and if one cuts one off at the inflection points going down and up, something that looks like a U.  Over on Econbrowser, Jeffrey Frankel recently posed that the current situation might end up looking like a U, although I doubt it.

After WW II it looks like quite a few fluctuations actually had more rapid upswings than downturns, asymmetric but in the opposite direction of a Lazy J, more an alert proper J, with a rapid upturn.  Over on Econbrowser David Papell posed something like this, although I really see no likelihood of a more rapid upturn to follow this massive downturn we have just seen.  This just seems out of the question.  My Lazy J looks more likely.

We have also seen some that do look like the V that the Trump gang hopes for.  Probably the most obvious and impressive candidate would be the fluctuation that bottomed out in 1982 under Reagan with an unemployment rate over 10%, higher even than the peak in 2009 during the Great Recesson.  After the deal was cut between Volcker and Baker for no more tax cuts in return Volcker would end his high interest rates after visiting and incoming Mexican Finance Minister Jesus da Silva threatened to default on Mexican debts to New York banks bearing those high interest rates, the economy zoomed back upwards through 1983, giving Reagan his “Morning in America” to run for reelection on, taking 49 states, certainly what is the hoping gleam in Trump’s eye for now.

Then we have candidate L. Near as I can see the US has never shown such a pattern, but recently John Cochrane was out there posing it as a possibility and claiming that was what we had during and after the Great Recession.  We certainly had the sharp decline upfront, but an L suggests that the economy then does not grow at all, simply lies flat.  We may have seen such a pattern in Mexico after the 1982 debt crisis and maybe also in Japan in the 1990s after its debt crisis.  But in the US we saw growth ranging from 1.5 to 3% annually following the turnaround, certainly not a flat line, although the “no growth” story fits longstanding GOP propaganda repeated by Trump regarding the performance of the economy under Obama, even though the growth rates after he came in were not noticeably superior to those under Obama.

As it is, what happened then looks like a throwback to the 1800s, and maybe also the most likely scenario now if we avoid another near term downturn, an asymmetric pattern of a sharp downturn followed by a much slower upturn, in short the Lazy J.

Barkley Rosser