What Is a K-Shaped Recovery?

How a K-Shaped Recovery Works

When you hear the term “K-shaped recovery,” you may also hear “K-shaped recession.” Every recession in U.S. history has been followed by a period of economic recovery. In fact, recessions are typically brief and recovery usually starts fairly quickly, according to the National Bureau of Economic Research. But it doesn’t always look the same. In the case of a K-shaped recovery, certain parts of the population bounce back more quickly than others.

“A K-shaped recovery is when different segments of the economy recover from a recession or an economic shock at different rates,” Dr. Robert Johnson, chartered financial analyst (CFA) and professor of finance at the Heider College of Business at Creighton University, told The Balance in an email. “It gets its name from the shape of the letter K—that is the trajectory of part of the letter points up and the other points down.”

In some cases, recoveries in a K-shaped recovery could mean that different industries recover at different speeds, but it could also refer to the experiences of different individuals.

Example of a K-Shaped Recovery

The 2020 recession is a good example of a K-shaped recovery. Restaurants were some of the hardest-hit businesses during the recession. By December 2020, restaurants reported a 36% decline in revenue, according to the National Restaurant Association, and a projected 17% had closed for good.

At the same time, other industries thrived. As companies transitioned to remote work, they became more reliant on video services like Zoom. As a result, the web conferencing industry grew rapidly and is expected to grow 39.3% through 2030.

In this example, web conferencing companies would represent the upper part of the K in the recovery, while restaurants would represent the lower part. It’s clear that the industries are having vastly different experiences as the overall economy recovers.

What Causes a K-Shaped Recovery?

A K-shaped recovery is generally caused by a recession that impacts certain populations and groups differently. It’s also caused by disparities that existed before a recession, such as in the case of the wealth gap that has only continued to widen.

“K-shaped recovery occurs right after a recession that further exacerbates wealth inequality,” Dr, Bob Castaneda, program director of accounting and finance for Walden University, told The Balance in an email. “The financial shape of individuals and companies are inconsistent in that some are unscathed or profit while others are devastated by job loss or industry or company shutdowns."

K-shaped recoveries tend to negatively impact minorities, families with low incomes, newcomers in the workforce, and industries like travel and hospitality, Castaneda said.

Other Possible Recovery Shapes

Economic recoveries can take on a variety of shapes, most often dependent on the speed at which they occur

V-Shaped

A V-shaped recovery is the quickest and one of the most ideal. In this type of recovery, the economy falls quickly but also recovers quickly—it doesn’t remain stagnant for very long.

U-Shaped

A U-shaped recovery is a bit more drawn out than a V-shaped one. The economy declines more slowly but also recovers more slowly.

W-Shaped

A W-shaped recovery, also known as a double-dip recession, involves a short recovery followed by another decline before the economy goes into a more long-term recovery.

L-Shaped

An L-shaped recovery is the least optimistic. With this type of recovery, the economy declines quickly but then remains stagnant for a long period before improving in a meaningful way.

Was the 2020 Recession K-Shaped or V-Shaped?

There’s some debate among economic experts as to whether the recovery from the 2020 recession was V-shaped or K-shaped. On one hand, the S&P 500 recovered rapidly after a 34% decline in early 2020. The index hit a record high in February, plummeted in March, and then returned to a record high in August.

A swift and broad policy response helped the recovery from the 2020 recession take the shape of a V, according to Dan Russo, portfolio manager at Potomac Fund Management. 

“Importantly, it was coordinated across both fiscal and monetary policy,” Russo told The Balance in an email. “Not only did the Federal Reserve act on the monetary side of the coin by keeping interest rates extremely low, but fiscal policy was enacted to ensure that people actually had ‘money in their pockets.’ This included extended and enhanced unemployment payments as well as stimulus payments sent directly to many people.”

Johnson disagreed, though, pointing out that recovery wasn't evenly spread across industries or communities, suggesting a K-shaped recovery. As S&P Global suggested, industries such as airlines and leisure activities continued to feel the effects of the economic dip long after the stock market bounced back.

How an Economic Stimulus Affects the Recovery Shape

In 2020, the federal government responded with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signing it into law just 11 days after the Dow Jones Industrial Average suffered big losses. According to experts, government response is one of the most important factors in encouraging the right type of recovery.

“The more targeted (and correctly targeted) the economic stimulus is, the less likely the recovery will be uneven,” Johnson said. “Some industries and sectors (like travel and leisure) need much more help than other industries (like information technology) to recover from the economic shock precipitated by the pandemic. The problem is that politics ultimately dictates which sectors of the economy receive aid instead of an unbiased examination.”

A V-shaped recovery is ideal since the economy recovers quickly and cohesively. But in a recession that more heavily impacts certain industries or communities, a K-shaped recovery is more likely unless economic stimulus targets the right areas.

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