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.
The late 20th and early 21st centuries saw many 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.
In the modern U.S. economy, change and uncertainty have become the norm. So, it’s especially important for business leaders to understand the causes and effects of the recessions that took place in the past 40 years, the steps taken to combat them, and how those steps impacted the business community.
The Double Dip Recessions 1980-82
The United States experienced a brief recession in 1980 and a longer, more painful recession beginning in 1981. These recessions were brought about by tight monetary policy and global energy shortages.
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, Fed Chair Paul Volcker shifted the Fed’s focus from interest rates to the money supply in an effort to reduce inflation. Under his 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 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. Secondly, this act removed the cap on interest rates that savings and loan institutions could pay on deposits, encouraging Americans to save more and decreasing the rate of return disparity between the wealthy and the average American. While these policies proved influential in the long run, they did not immediately solve the inflation problem that plagued the United States throughout the previous decade.
In addition to controlling the money supply, the Fed increased the federal funds rate from about 11% in 1979 to nearly 18% by the spring of 1980. A second energy crisis caused by the Iranian Revolution in 1979 caused a reduction in the global supply of oil, driving up prices. When coupled with the rapidly increasing interest rates, a recession occurred between January and July of 1980. Despite the drastic measures taken to control the money supply and raise interest rates, inflation only slightly decreased during this time. Inflation in the midst of the 1980 recession was 14.6% and fell to 13% in the fall of 1980. The recession in 1980 lasted only 6 months and resulted in an unemployment rate over 7% which did not relent after the recession ended.
There was a brief respite for the American economy after the recession of 1980, where the fed funds rate once again dropped below 10%. With inflation still well above an acceptable level, the Fed took action once again to achieve its goal of disinflation. In the fourth quarter of 1980, the Fed began raising the federal funds rate again and it surpassed 19% by mid-year of 1981. A third global energy crisis ensued when the new Iranian regime decreased oil output from the country, once again restricting the global supply of oil and bringing prices up. The second of the double-dip recessions ensued.
Despite the deep recession in 1981-82, the Fed refused to loosen monetary policy, arguing that bringing down inflation was vital to the future of the American economy. This second round of tighter monetary policy succeeded in bringing inflation down and the inflation rate by 1983 was below 3.5%. The consequences of the extended tight monetary policy were a 2.9% decrease in GDP and a peak unemployment rate of 10.8% during the 16-month recession.
The double-dip recessions of 1980 and 1981 are widely considered as some of the worst economic downturns after the Great Depression, surpassed only by the Great Recession in 2007. Tax cuts by the Reagan administration, increased defense spending, and loosening monetary policy brought the country out of recession after disinflation goals were achieved. These measures helped to bring the country into a period of expansion that lasted throughout the rest of the decade.
The Savings and Loan Crisis – 1980’s and 1990’s
While not technically a recession, The Savings and Loan [S&L] crisis is an important occurrence 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 capping interest rates that could be paid on deposits.
In 1980, there were about 4,000 S&Ls and they funded half of the residential mortgages in the United States. In the early 1980s, S&Ls grew rapidly, 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. By 1989, more than 1,000 S&Ls failed. 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 inflation towards the end of the decade which the Fed sought to tame through tighter monetary policy in 1990. With tighter monetary policy slowing the US economy, the spike in oil prices following Iraq’s invasion of Kuwait led to a brief recession in the U.S.
The increased oil prices caused manufacturing to decline. Real estate was also impacted by high interest rates, the continuation of the Savings and Loan crisis, and overbuilding in the 1980s. During the time period from July 1990 through March 1991, GDP fell 1.5% and unemployment reached 7.8%. By 1993, the economy had recovered – fueled by a boom in personal computer production, low interest rates and 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 meme-coin craze that is occurring today in cryptocurrencies, just about any stock with internet or ‘.com’ in the name was growing rapidly in price during late 90’s – despite many of them having no measurable value.
In 1999 and 2000, the Fed raised interest rates by 1.75%, attempting to curb rapidly rising inflation. Also in March of 2000, Japan entered a recession 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 off 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. The September 11 attacks and accounting scandals with Worldcom and Enron further diminished investor sentiment and stock prices. While the tech bubble had a severe and lasting effect on stock prices, the overall economic effects were less than previous recessions. GDP fell by only 0.6% and unemployment reached a moderate 5.6%. However, the Nasdaq lost 75% of its value during the recession and did not fully recover until 2015.
The Great Recession 2008-09
In the early and mid 2000s, paperwork requirements for mortgages were loose, and mortgage brokers pooled these subprime loans into new financial products which were sold to both individual and corporate investors. In response to the new, less strenuous requirements, more mortgages were issued, and home prices rose rapidly. By 2007, buyers were defaulting on mortgages and foreclosure rates jumped 79% that year.
The issuers of subprime mortgage-back financial products suffered, and many filed for bankruptcy. Mortgage qualification reverted back to more stringent requirements and with loans more difficult to obtain, fewer buyers could afford to purchase homes and housing prices fell.
Government sponsored enterprises, Fannie May 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 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. In the first quarter of 2020, GDP fell 5%. Then in the second quarter, it fell further by a record 31.7%. In the 3rd quarter, GDP had started to improve, but the recovery is still underway.
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, several bills were passed by both the Trump and Biden administrations to provide economic relief to those out of work due to the pandemic. These actions included eviction moratoriums, stimulus checks, increased unemployment insurance, and paid sick leave.
While it felt certain that the worst of the pandemic was in the past by early 2021, the delta variant has emerged and renewed anxiety among government leaders and investors. As it stands today, the history of the COVID-19 pandemic and its effect on the economy is still unfolding.
Common Factors in Modern Recessions
The major recessions in the modern era 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 an increasingly global 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 shoring up 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. Since 2000, the U.S. has experienced the two longest economic expansions in the country’s history and two of the worst recessions.
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