History of Recessions in the United States
Causes, Length, GDP, and Unemployment Rates
The history of recessions in the United States shows that they are a natural, though painful, part of the business cycle. The National Bureau of Economic Research determines when a recession starts and ends.
The Bureau of Economic Analysis measures the gross domestic product that defines recessions. The Bureau of Labor Statistics reports on the unemployment rate. Unemployment often peaks after the recession ends because it is a lagging economic indicator. Most employers wait until they are sure the economy is back on its feet again before hiring permanent employees.
There have been many recessions, large and small, throughout U.S. history. Most of these were noteworthy in some way because of their impacts, which included changes in federal laws.
The Panic of 1797 resulted from land speculation in the newly-formed United States. The bubble burst just as deflation in Europe impacted the rest of the world. Robert Morris, who helped finance the Revolutionary War, ended up in prison for his debts. He was in debt despite owning more land at that time than anyone else in the United States.
The Ohio Life Insurance and Trust Company failed. In addition, approximately 5,000 businesses went under during the first year of a panic that lasted about 18 months.
Jay Cooke & Company was the largest U.S. bank when it failed. Subsequent labor issues led to the Great Railroad Strike of 1877. The recession lasted more than five years.
The failure of the Reading Railroad was a key component of this recession, which lasted approximately four years. Unemployment topped 10%. About 500 banks closed.
The Great Depression
Lasting from 1929 until 1938, it was the biggest economic crisis in U.S. history. Unemployment reached 25% in 1933 and remained at 19% in 1938. The Depression ended because of three things: the New Deal, the end of the drought that caused the Dust Bowl, and increased spending for World War II.
This recession lasted eight months, from February to October, although it felt longer to those who endured it. GDP continued falling until it reached -11.6% in 1946. It was a natural result of the demobilization from World War II and the sharp drop in demand for military weapons. Government spending also dropped, although business spending was robust.
This 11-month recession began in November 1948. It lasted until October 1949, when unemployment reached a peak of 7.9%. It was a mild adjustment as the economy continued adapting to peacetime production.
|GDP Growth||Q1 (Jan.–March)||Q2 (April–June)||Q3 (July–Sep.)||Q4 (Oct.–Dec.)|
This recession lasted 10 months, from July 1953 to May 1954. It resulted from demobilization following the Korean War. Unemployment didn't reach its peak of 6.1% until September 1954, four months after the recession ended. In 1953, GDP contracted 2.2% in the third quarter and 5.9% in Q4. In 1954, it contracted 1.9% in Q1.
In this recession, which took place from August 1957 to April 1958, GDP fell 4.1% in Q4 1957, then plummeted another 10% in Q1 1958. Unemployment didn't reach its peak of 7.5% until July 1958. The Fed's contractionary monetary policy is considered the cause of this economic slowdown.
Starting in April 1960, this recession lasted 10 months, until February 1961. GDP was -2.1% in Q2 1960, rose 2.0% in Q3, but was -5.0% in Q4. Unemployment reached a peak of 7.1% in May 1961. President John F. Kennedy ended the recession with stimulus spending. His opponent, Richard Nixon, said the recession cost him the election. He had been vice president, so voters blamed the Republicans for causing it.
This recession was relatively mild, lasting 11 months—from December 1969 to November 1970. GDP was -1.9% in Q4 1969. It was -0.6% in Q1, then rose 0.6% in Q2 and 3.7% in Q3. In Q4, it was -4.2% before rising 11.3% in Q1 1971. Unemployment peaked at 6.1% in December 1970.
This recession lasted 16 months, from November 1973 to March 1975. The Organization of Petroleum Exporting Countries (OPEC) is blamed for quadrupling oil prices. But the OPEC oil embargo alone didn't cause such a deep recession. Two other factors contributed.
First, President Nixon instituted wage-price controls. This kept prices too high, reducing demand. Wage controls made salaries too high and forced businesses to lay off workers. Second, Nixon took the United States off the gold standard in response to a run on the gold held at Fort Knox, which led to inflation. The price of gold skyrocketed to $120 an ounce while the dollar's value plummeted.
The result was stagflation and five quarters of negative GDP growth: 1973 Q3, -2.1%; 1974 Q1, -3.4%; Q3, -3.7%; Q4, -1.5%; and 1975 Q1, -4.8%. Unemployment reached a peak of 9% in May 1975, two months after the recession had ended.
The economy suffered a double whammy of two recessions in this period. There was one during the first six months of 1980. The second lasted 16 months, from July 1981 to November 1982.
The Fed caused this recession by raising interest rates to combat inflation. That reduced business spending. The Iranian oil embargo aggravated economic conditions by reducing U.S. oil supplies, which drove up prices.
GDP was negative for six of the 12 quarters. The worst was Q2 1980 at -8.0%. Until the 2008–2009 recession, that was the worst quarterly decline since the Great Depression. Unemployment rose to 10.8% in November and December 1982, the highest level in any modern recession. It was above 10% for 10 months. President Reagan lowered the tax rate and boosted the defense budget, helping to end the recession.
This recession ran nine months, from July 1990 to March 1991. The 1989 savings and loan crisis caused it. GDP was -3.6% in Q4 1990 and -1.9% in Q1 1991. Unemployment peaked at 7.8% in June 1992.
The 2001 recession lasted eight months, from March to November. It was caused by a boom and subsequent bust in dot-com businesses. The boom was partially created by the Y2K scare in 2000. Companies bought billions of dollars’ worth of new software because they were afraid the old systems weren't designed to transition from the 1900s to the 2000s. But many dot-com businesses were significantly overvalued and failed.
The Great Recession was the worst financial crisis in the United States since the 1929 Depression. It also was the longest-lasting: from December 2007 to June 2009. The subprime mortgage crisis was the trigger. That created a global bank credit crisis in 2007. By 2008, the credit crisis had spread to the general economy through the widespread use of derivatives.
The economy shrank in five quarters, including four quarters in a row. Two quarters contracted more than 5%. In Q4 2008, GDP was -8.4%, worse than any other recession since the Great Depression. The recession ended in Q3 2009, when GDP turned positive, thanks to an economic stimulus package.
The BEA revises its GDP estimates as it receives new data. It often recalibrates its estimates in July of each year. Using the 2008–2009 recession as an example, here are the final estimates compared to the initial estimates made one month after the quarter ended. These numbers demonstrate how difficult it is to correct a recession until it's already started. They also serve as a reminder of how difficult it is to time the market with your investments.
- Q1: The economy shrank 2.3%. Initially, the BEA thought it grew 0.6%.
- Q2: The economy rebounded 2.1%. The initial release said it grew 1.9%. Everyone thought the Fed's rescue of Bear Stearns ended the threat to financial markets.
- Q3: The economy shrank 2.1%, much more than the -0.3% initial estimate.
- Q4: The economy collapsed, shrinking 8.4%. The BEA initially said it shrank only 3.8%, which seemed bad enough.
- Q1: The economy shrank 4.4%. The initial estimate said it shrank 4.9%.
- Q2: The economy contracted 0.6%, better than the initial estimate of -1.0%.