The W-Shaped Economic Recovery

When it comes to grading the economy, most professors would probably award a C-. But the letters bandied about now when macroeconomists congregate are L, U, V and W. Those letters refer to the shape of the recovery. An L signifies a trough followed by a long period of stagnation, like what Japan experienced during its "lost decade" of the '90s. But since the U.S. government moved with greater speed and force than Japan's economic managers did, many forecasters see economic growth by the end of the year. So, L averted.

Recoveries since the 1940s have typically looked like V's—with the speed and strength of the bounce back mirroring the fall. But with the economy still shrinking—albeit more slowly—we could be in for a U, in which the economy carves a longer arc of bottoming before recovering. Many smart economists, however, are looking farther down the alphabet—to W. Which is to say the economy may go up and down before resuming its course of growth. Why the W? The Fed, along with every other central bank in the world, is printing money faster than ever. As a result, inflation may go back up. When it does, "the Fed is going to have to fight it hard, and that's going to sharply dampen growth," says Johns Hopkins economist Steve Hanke. Add the prospect of further banking losses and rising taxes, and a second dip seems even more likely. The era of W may be over in politics. But in economics, it could just be beginning.