The economy has suffered downturns before, although the majority of post World War II recessions haven’t been quite as deep, or caused by the same factors, as the current recession.

As a result, there are no real parallels in terms of judging how our economy may emerge.

That hasn’t stopped the prognostications about the “shape” of the coming recovery, however, which are usually cast in the form of letters–specifically L, U, V and W.

We may see another down-leg for the economy, as many fear. But there will have to be another catalyst entirely–and at least one on par with last year’s financial system meltdown–to induce investors to run for the hills.

 “L” Is for Loser

The dreaded L-shaped “recovery” is every investor’s nightmare. It mirrors the terrible Japanese Nikkei in the 1990s, which experienced a deep slump for more than a decade. Investors lost money and opportunity. Despite interest rates of nearly 0 percent, the Japanese economy was dormant for nearly a dog’s lifetime.

Japan’s economy and its stock market was saddled with bad economic policy, including a lack of transparency in banking and asset valuation; a reluctance to mark inventory to market; and  an “honorable system” in which too many failing enterprises were supported in order to save face and maintain traditional relationships.

In an L-shaped scenario output falls sharply and the central banks’ low interest rate cuts simply won’t work. Consumers and businesses, already loaded down with debt and lowered asset values, are reluctant to buy or borrow. Spending dries up.

U-Turn

The man credited with “calling” the subprime-related financial crisis and subsequent global recession, Nouriel Roubini, forecasts a U-shaped recovery marked by anemic GDP growth and consumer deleveraging over the ensuing few years.

The U-shaped recovery takes a little longer and is a little tougher to endure. Growth continues at a slow pace. The stock market in the U scenario continues to trend downward, despite intermittent rallies. Confidence is shaken. Nerves are frazzled. Worry and anxiety become widespread. After major capitulation, an upward trend develops. There is light at the end of the tunnel.

In this case, Asia, too, will have a U-shaped recovery. Although Asia might have a stronger rebound compared to other regions, Roubini’s RGE Monitor suggests the strength of the recovery will vary across countries.

Economies highly dependent on exports, such as Japan, the Asian Tigers and Malaysia, might witness a slower recovery and will take longer to go back to the pre-crisis growth rates. Countries with larger domestic demand, attractive asset markets, greater policy space and/or faster reforms, such as China, India, Indonesia, Vietnam and the Philippines, might witness a stronger recovery.

The Vivacious V

This is the most pleasant form of an economic downturn/recovery. Growth in this scenario picks up almost as quickly as it slid. In the V-shaped recovery, bargain hunters pour back into the markets, thus reinforcing the wealth effect. Buoyed by paper riches in stock appreciation, investors continue to spend on new houses, cars, furnishings and apparel. One key part of the traditional V scenario–an uptick in consumer debt based on credit card spending–seems rather unlikely at this point.

The global equities rally off the March 9 lows is premised on a steady improvement in economic data. Key measures of activity in critical markets have turned up, and the Reserve Bank of Australia’s move to raise interest rates a quarter point to 3.25 percent sent another signal that growth has resumed.

Based on the recent narrowing of high-yield spreads to Treasuries, one analyst forecast GDP growth of 4 percent in the US in 2010. This would mirror the V depicted in the graphic. Another posits that because consensus forecasts were far too optimistic a year ago they are likely far too pessimistic about year-ahead prospects.

The S&P 500 has rallied more than 56 percent since March 9, a sign we may be in for a V.

The Upside of the W

Pessimists make the case that the massive effect of the bursting of the credit bubble on the consumer can’t be understated and that the growth we’ve seen in the third quarter is illusory. Fiscal and monetary authorities greased the skids with deficit spending and money-printing, setting an unsustainable bar and a backdrop for disappointment.

This market remains in perpetual fear that the better economic news we’ve seen of late actually just marks the second leg of a “Big W.”

In other words, in late 2008 and early 2009, we saw the first sharp down-leg for the economy and the market. Since the March bottom, we’ve been coming up the first up-leg. Now the stage is set for another terrifying down-leg, before we at last cycle our way out of this recession.

If indeed there is underlying weakness in 2010 or 2011, then it’s a good thing the US stimulus package incorporated substantial spending for long-gestating infrastructure projects. If the recession is prolonged and the recovery unfolds at a relatively slow pace, the concerns about timing were misplaced.

The biggest worry remains employment. Initial claims for unemployment insurance and number of hours worked are often viewed as leading economic indicators. Initial claims peaked in March, but have improved little since August. Average hours per week in manufacturing fell back a bit last month, undoing some of the earlier rebound. Hours worked for the broader economy remain at the low point for this cycle.

And total employment, generally regarded as a coincident economic indicator, continues to plummet, with a quarter million fewer Americans on payrolls in September compared with August (seasonally adjusted). That this is not as rapid a decline as we saw at the start of the year can no longer provide much comfort to anyone.

Consumers make up over 70 percent of the economy; if they’re not a driving factor of the recovery, then the speed of the recovery will likely be impaired. Indeed, household spending has played a substantial role in virtually every economic recovery in the post-World War II era.