The 2001 Recession

Y2K Scare, 9/11 Attack, and Beyond

President Bush Dealing With the 2001 Recession.

Eric Draper / The White House / Getty Images

The 2001 recession was an eight-month economic downturn that began in March and lasted through November. While the economy recovered in the fourth quarter of that year, the impact lingered and the national unemployment continued to climb, reaching 6% in June 2003. The following sections provide details on how the recession started and worsened, and what ultimately led to its end.

Contributors to the Recession: Y2K Scare and 9/11 Attack

The Y2K scare (also known as the Year 2000 scare) may have contributed to the 2001 recession. Computer users and programmers feared that computers would stop working on Dec. 31, 1999. Since many computer codes represented a given year with the last two digits, they believed that these codes would not be able to distinguish between 2000 and 1900. Based on the belief that their computers would stop working when the year 2000 arrived, many companies and individuals bought new ones with software that was supposed to be Y2K compliant.

The scare led to an economic boom that was short-lived. Computer and software sales declined, since they were all bought in advance of January 2000. Subsequently, the stock market dropped in March 2000, and as stock prices declined, dot-com companies went bankrupt. The circumstances were exacerbated when the Federal Reserve raised the fed funds rate numerous times in efforts to stop the economy from overheating.

While the Y2K scare contributed to the 2001 recession, it is not clear whether the scare in fact caused it.

The 9/11 attack worsened the downturn. The markets closed for several days after the attacks, and the New York Stock Exchange did not reopen until Sep. 17, 2001. That day, the Dow Jones Industrial Average (DJIA) had its largest one-day drop, falling 684.81 points or -7.1%.

End of the Recession: Tax Cuts and Fed Funds Rates

To end the recession, President George W. Bush began working with Congress to cut taxes immediately upon entering office. On June 7, 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which gave income tax relief to families retroactive to January of that year. EGTRRA lowed the maximum tax rate of 39.6% to 35%, the 36% rate to 33%, the 31% rate to 28%, the 28% rate to 25%, and some of the 15% tax rate to 10%. EGTRRA also expanded the Earned Income Tax Credit. It also doubled the standard deduction, raised the threshold for the 15% tax bracket for married couples, and doubled the child tax credit from $500 to $1,000.

These tax cuts by the Bush administration enabled taxpayers to keep more of their own money. The economy returned to growth in the fourth quarter of 2001.

The Federal Reserve's expansionary monetary policy also contributed to the end of the recession. The Federal Reserve began lowering rates in January 2001, and continued to lower them by approximately one-half point each month, so that the rate was 1.82% (i.e., lower than 2%) by December 2001. This decision was made out of an effort to stimulate the economy by providing for more liquidity.