History of Economic Turmoil in the U.S. Part 3 – The Modern Economy
There have been several lengthy and devastating recessions in U.S. history and many serious economic contractions. Each of these developed from a unique set of circumstances and resulted in a better understanding of how recessions shape our nation’s views on investments, risk, and the role of government.
This three-part series explores the catalysts for the most influential recessions in U.S. history and how they changed the nation. Catch up on past recessions with Part 1 of this series which discusses the earliest recessions in America and Part 2 which explores the recessions of the mid-20th century. In this final installment, we will cover the recessions of the past 40 years.
The modern U.S. economy was shaped by new developments in financial technology and increasingly complex financial markets – which were heavily influenced by globalization. These changes created new opportunities and challenges for the global economy. During this time, the U.S. economy reached new heights during periods of economic expansion and suffered significant setbacks during recessions.
The Double Dip Recessions 1980-82
The United States experienced a brief recession in 1980 and a longer, more painful recession beginning in 1981. Tight monetary policy and global energy shortages were credited with contributing to both of these bouts of turmoil.
The Recession of 1980
The staggering inflation of the 1970s was a major issue in the American political landscape at the turn of the decade. There were several years that recorded double-digit inflation – including 1979 when inflation reached 11%.
That year, Federal Reserve Chairman Paul Volcker shifted the Fed’s focus from interest rates to the money supply in an effort to reduce inflation. The Fed had already increased the Federal Funds Rate from about 11% in 1979 to nearly 18% by the spring of 1980. However, this was not enough.
Additionally, the Iranian Revolution in 1979 spurred further stress in the global economy and reduced the global supply of oil – leading to more inflation. Increased oil costs coupled with the rapidly rising interest rates led to a recession between January and July of 1980.
Under Volcker’s leadership, one of the most important pieces of legislation for the Federal Reserve was passed in 1980 – The Depository Institutions Deregulation and Monetary Control Act. It made two major changes to U.S. banking.
First, the legislation applied reporting and reserve requirements to all deposit institutions – thereby increasing the control of the Federal Reserve over the money supply exponentially. Second, this act removed the cap on interest rates that savings and loan institutions could pay on deposits. This encouraged Americans to save more and decreased the rate of return disparity between the wealthy and the average American.
Despite the drastic measures taken to control the money supply and raise interest rates, inflation only slightly decreased during this time. It reached 14.6% in the midst of the recession and fell to 13% in the fall of 1980.
The effects of this recession were also felt in the labor market. The unemployment rate surpassed 7%, and the widespread joblessness did not relent after the recession ended.
The Recession of 1981
There was a brief period of respite for the American economy after the recession of 1980 – where the Fed Funds Rate once again dropped below 10%. However, inflation remained above an acceptable level and the Fed took action once again to achieve its goal of disinflation.
In the fourth quarter of 1980, the Fed began raising the Fed Funds Rate, and it surpassed 19% by mid-year 1981. Additionally, a third global energy crisis ensued when the new Iranian regime decreased oil output – once again restricting the global supply of oil and raising prices. The second of the double-dip recessions ensued.
Despite the deep recession in 1981-82, the Fed refused to ease monetary policy. They argued that lower inflation was vital to the future of the American economy. This second round of tighter monetary policy succeeded in reducing inflation to a rate of around 5% by October 1982.
The consequences of the extended tight monetary policy were severe. The U.S. experienced several consecutive quarters of declining GDP and a peak unemployment rate of nearly 11% during the 16-month recession.
The double-dip recessions of 1980 and 1981 are widely considered as some of the worst economic downturns since the Great Depression – surpassed only by the Great Recession in 2007. Tax cuts, increased defense spending, and easing monetary policy brought the country out of this troubling economic period once disinflation goals had been achieved.
The Savings and Loan Crisis – 1980s and 1990s
While not technically a recession, The Savings and Loan [S&L] crisis is an important event because it affected the U.S. economy for over a decade. It began in the early 1980s after inflation and interest rates had risen drastically and the federal government loosened regulations that capped the rates that could be paid on regular deposits.
In 1980, there were about 4,000 S&Ls and they funded half of the residential mortgages in the United States. S&Ls grew rapidly in the early 1980s, fueled by deregulation of the industry.
After the federal government loosened regulations, these institutions offered above market interest rates, known as bidding-up, to increase deposits. To fund these high interest payments, S&Ls shifted their focus from residential mortgages to other, riskier investments like construction and commercial loans.
Competition from banks, mismanagement by owners, and a decline in real estate values combined to make many Savings and Loan institutions insolvent. More than 1,000 S&Ls failed by 1989. Those failures continued into the early 90s, and many of the consumer deposits that were lost were backed by the now defunct Federal Savings and Loan Insurance Corporation. Ultimately, the Savings and Loan crisis cost taxpayers $124 billion.
The Gulf War Recession 1990-91
The economic expansion of the 1980s brought back inflation towards the end of the decade. So in 1990, The Fed sought to tame these price increases by tightening monetary policy. Higher interest rates combined with a spike in oil prices following Iraq’s invasion of Kuwait led to a brief recession in the U.S.
Increased oil prices caused manufacturing to decline during this time. Additionally, the real estate market was impacted by high interest rates, the continuation of the Savings and Loan crisis, and overbuilding in the 1980s.
During the period from July 1990 through March 1991, GDP contracted by 1.5% and unemployment reached 7.8%. Fortunately, the economy had recovered by 1993 – fueled by a boom in personal computer production, interest rate reductions, lower energy prices, and a recovery in the real estate market.
The Tech Bubble
Near the turn of the century, tech stocks were trading at previously unimaginable valuations. Many stock prices were overinflated, and investors were pouring money into internet stocks that had yet to show a profit. Much like the recent meme-coin craze in cryptocurrencies, just about any stock with internet or ‘.com’ in the name was growing rapidly in price during the late 90’s.
In 1999 and 2000, the Fed raised interest rates by 1.75%, attempting to curb rapidly rising inflation. Japan entered a recession during this time, which triggered a selloff in both U.S. and Japanese stock markets. Another selloff in the American markets occurred during April when investors presumably sold some of their holdings to pay taxes.
Also in April, a lawsuit found Microsoft guilty of monopolization under the Sherman Antitrust Act. This lawsuit, coupled with numerous articles warning of overvaluation, changed consumer sentiment. Finally, the September 11 attacks and accounting scandals with Worldcom and Enron further diminished investor sentiment and stock prices.
The resulting stock market crash caused the Nasdaq to lose 75% of its value, and it did not fully recover until 2015. However, the overall economic effects were less than previous recessions. GDP fell by only 0.6% and unemployment reached a moderate 5.6%.
The Great Recession 2008-09
In the early and mid-2000s, paperwork requirements for mortgages were loose which led to a rise in loans and rapidly rising home prices. Mortgage brokers pooled subprime loans into new financial products which were sold to both individual and corporate investors. The tenuous situation couldn’t last, and by 2007, buyers were defaulting on mortgages and foreclosure rates jumped by 79%.
The issuers of subprime mortgage-backed financial products suffered, and many filed for bankruptcy. Mortgage qualification reverted to more stringent requirements, and with loans more difficult to obtain, fewer buyers could afford to purchase homes. This resulted in a housing market crash.
Government sponsored enterprises, Fannie Mae and Freddie Mac, suffered severe losses and were seized by the federal government in 2008. The subprime mortgage crisis triggered a crisis in the banking and financial services industries which led some major investment banks to fail. U.S. stock markets crashed, losing more than 50% of their value at the peak of the panic.
During the 18-month recession, GDP fell by 4.3% from its peak and the unemployment rate reached 10%. The federal government issued a bailout for the hardest hit industries including financial services, automobiles, and insurance industries. In addition, the federal government issued a massive stimulus package that helped to reset the US economy.
The COVID-19 Recession of 2020
The recession brought on by the COVID-19 pandemic was the most severe since the Great Depression, but it only lasted two months. GDP fell by 5% in the first quarter of 2020. Then in the second quarter, it fell by a record 31.7%. GDP had begun to improve by the third quarter, despite the lingering effects of the pandemic.
During the spring of 2020, many states required non-essential businesses to shutter in-person operations and unemployment spiked to 14.8%. The service and hospitality industries were hit hardest but almost all sectors felt the impact of the closures.
In response to the pandemic and subsequent recession, several bills were passed by both the Trump and Biden administrations to provide economic relief to those out of work. These actions included eviction moratoriums, stimulus payments, increased unemployment insurance, and paid sick leave. In addition to helping unemployed Americans, government action helped to pull the economy out of recession quickly.
Common Factors in Modern Recessions
The major recessions in the modern era mostly resulted from overinflation in key sectors of the market. This hyperinflation was commonly driven by investor speculation and risky investments made by companies seeking to compete in a globally competitive market. Lack of regulation in the banking industry facilitated both the Savings and Loan Crisis and the Great Recession in 2008, but modern governments have made great strides in improving regulations and reducing lasting impacts of these events.
The recessions in the modern era have been further apart but more severe than in previous timeframes – due in part to government intervention. Possibly the most surprising fact from this area is that the two longest economic expansions in the country’s history and two of the worst recessions have all been experienced since the year 2000.
Shield Your Business Cash from Economic Turmoil with ADM
Markets can turn quickly, and maintaining the appropriate level of cash reserves allows your business to more readily react to these events. That’s why having the right partner is essential to a modern cash management plan.
At American Deposit Management, we developed cash management solutions that provide extended government insurance that protects the entirety of a business’s cash reserves – with a single deposit and a single monthly statement. In addition to safety, our nationwide network of financial institutions competes for deposits, and that allows us to offer nationally competitive returns for business cash – with next-day liquidity.
To learn more about this valuable cash management program, contact a member of our team.
*American Deposit Management is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.
FOMC Lowers Interest Rates at Final 2024 Meeting
At the last FOMC meeting of 2024, committee members voted to reduce the Fed Funds Rate and released updated economic projections.
History of Economic Turmoil in the U.S. Part 2 of 3 – Mid-20th Century
Part two of this three-part series explores the catalysts and resolutions of the worst recessions in the mid-20th century.
A Brief History of U.S. Bank Failures
Devastating bank failures occur frequently in U.S. history, but government action has significantly reduced the risk of losses.