Early 1980s recession in the United States
Encyclopedia
The United States entered recession in January 1980 and exited six months later, in July 1980. Although recovery took hold, the unemployment rate
remained unchanged through the start of a second recession in July 1981. The downturn ended sixteen months later, in November 1982. Following the recession, the economy recovered strongly and experienced a lengthy expansion through 1990.
Principal causes of the 1980 recession were contractionary monetary policy
undertaken by the Federal Reserve
to combat double digit inflation and residual effects of the energy crisis
. The manufacturing and construction sectors failed to recover before more aggressive inflation reducing policy was adopted by the Federal Reserve in 1981, causing a second downturn. Due to their proximity and compounded effects, they are commonly referred to as the early 1980s recession, an example of a W-shaped or "double dip" recession.
rose considerably between 1978 and 1980. These increases were largely attributed to the oil price shocks of 1979 and 1980, although the core consumer price index which excludes energy and food also posted large increases. Productivity, real gross national product, and personal income remained essentially unchanged during this period, while inflation continued to rise, a phenomenon known as stagflation
.
In order to combat rising inflation, recently appointed chairman of the Federal Reserve, Paul Volcker
, elected to increase the federal funds rate
. Following the October 6, 1979 meeting of the Federal Open Market Committee
, the federal funds rate increased gradually from 11.5% to an eventual peak of 17.6% in April 1980. This caused an economic recession beginning in January 1980, and in March 1980, president Jimmy Carter
created his own plan for credit controls and budget cuts to beat inflation. In order to cooperate with these new priorities, the federal funds rate was lowered considerably from its April peak.
industries, while the service sector remained largely intact. Over the course of the recession, manufacturing shed 1.1 million jobs, with the recession posting a total loss of 1.3 million jobs, representing 1.2% of payrolls. The automotive industry, already in a poor position due to weak sales in 1979, shed 310,000 jobs, representing 33% of that sector. Construction declined by a similar 300,000. Unemployment rose to a recession peak of 7.8% in June 1980, however it changed very little through the end of the year, averaging 7.5% through the first quarter of 1981.
Official end of the recession was established as July 1980. As interest rates dropped beginning in May, payrolls turned positive. Unemployment among auto workers rose from a low of 4.8% in 1979 to a record high of 24.7%, then fell to 17.4% by the end of the year. Construction unemployment rose to 16.3%, and also moderated near the end of the year. During the final quarter of 1980, there were doubts that the economy was in recovery, and instead was experiencing a temporary respite. These concerns were fueled by poor performance in housing and auto sales in the final months of 1980, as well as a second wave of rising interest rates and stagnate unemployment rate.
Unemployment had changed very little in the period between the end of the 1980 recession and the July 1981 start of the second, never dropping below 7.2%. Unemployment rose to double digits for the first time since 1941 in September 1982, and stood at a postwar high of 10.8% by the end of the year. The total increase in unemployment was 3.6%, which was less than the 1973–75 recession
increase of 3.8%, yet still higher than the 2.9% average. Because the recession began with already elevated levels of unemployment, the increase easily pushed it higher than any other post-war recession. Overall, the recession caused the loss of 2.9 million jobs, representing a 3.0% drop in payroll employment, the largest percentage decline since the 1957–1958 recession
.
Ronald Reagan
, who had assumed office in January 1981, brought his own economic plan to the table. In August 1981, the president signed the Economic Recovery Tax Act of 1981, a three year tax cut plan. As the recession deepened in 1982, Reagan's approval rating also dropped. As a result, during the 1982 midterm elections, Republican
gains made in the House of Representatives
during the 1980 election were reversed. However, control of the Senate was retained by the Republicans.
rose by 2.9 million and the unemployment rate fell by 2.5%. The auto industry had posted losses of $187 million in the third quarter of 1982, which turned into a gain of $1.2 billion during the same period in 1983. To prevent a new surge of inflation, interest and mortgage rates remained abnormally high throughout 1983, delaying a recovery in construction and housing.
A comparative analysis of the first six quarters of post-war economic recoveries published in the August 1984 issue of the Monthly Labor Review
indicated the 1983–1984 recovery was stronger than any post-war recovery since that of the 1953 recession
. As the third year of recovery drew to a close in 1985, payroll employment had grown by 10 million since the end of the recession. Growth continued through July 1990, creating what was at the time the longest peacetime economic expansion in U.S. history.
was identified as the primary cause of the savings and loan crisis
.
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
remained unchanged through the start of a second recession in July 1981. The downturn ended sixteen months later, in November 1982. Following the recession, the economy recovered strongly and experienced a lengthy expansion through 1990.
Principal causes of the 1980 recession were contractionary monetary policy
Contractionary monetary policy
Contractionary monetary policy is monetary policy that seeks to reduce the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry....
undertaken by the Federal Reserve
Federal Reserve Bank
The twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
to combat double digit inflation and residual effects of the energy crisis
1979 energy crisis
The 1979 oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil...
. The manufacturing and construction sectors failed to recover before more aggressive inflation reducing policy was adopted by the Federal Reserve in 1981, causing a second downturn. Due to their proximity and compounded effects, they are commonly referred to as the early 1980s recession, an example of a W-shaped or "double dip" recession.
Background
Beginning in 1978, inflation began to intensify, reaching double digit levels in 1979. The consumer price indexConsumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
rose considerably between 1978 and 1980. These increases were largely attributed to the oil price shocks of 1979 and 1980, although the core consumer price index which excludes energy and food also posted large increases. Productivity, real gross national product, and personal income remained essentially unchanged during this period, while inflation continued to rise, a phenomenon known as stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...
.
In order to combat rising inflation, recently appointed chairman of the Federal Reserve, Paul Volcker
Paul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...
, elected to increase the federal funds rate
Federal funds rate
In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend...
. Following the October 6, 1979 meeting of the Federal Open Market Committee
Federal Open Market Committee
The Federal Open Market Committee , a committee within the Federal Reserve System, is charged under United States law with overseeing the nation's open market operations . It is the Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money...
, the federal funds rate increased gradually from 11.5% to an eventual peak of 17.6% in April 1980. This caused an economic recession beginning in January 1980, and in March 1980, president Jimmy Carter
Jimmy Carter
James Earl "Jimmy" Carter, Jr. is an American politician who served as the 39th President of the United States and was the recipient of the 2002 Nobel Peace Prize, the only U.S. President to have received the Prize after leaving office...
created his own plan for credit controls and budget cuts to beat inflation. In order to cooperate with these new priorities, the federal funds rate was lowered considerably from its April peak.
1980
A recession occurred beginning in January 1980. As a result of the increasing federal funds rate, credit became more difficult to obtain for car and home loans. This caused severe contractions in manufacturing and housing, which were dependent on the availability of consumer credit. Most of the jobs lost during the recession centered around goods producingManufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
industries, while the service sector remained largely intact. Over the course of the recession, manufacturing shed 1.1 million jobs, with the recession posting a total loss of 1.3 million jobs, representing 1.2% of payrolls. The automotive industry, already in a poor position due to weak sales in 1979, shed 310,000 jobs, representing 33% of that sector. Construction declined by a similar 300,000. Unemployment rose to a recession peak of 7.8% in June 1980, however it changed very little through the end of the year, averaging 7.5% through the first quarter of 1981.
Official end of the recession was established as July 1980. As interest rates dropped beginning in May, payrolls turned positive. Unemployment among auto workers rose from a low of 4.8% in 1979 to a record high of 24.7%, then fell to 17.4% by the end of the year. Construction unemployment rose to 16.3%, and also moderated near the end of the year. During the final quarter of 1980, there were doubts that the economy was in recovery, and instead was experiencing a temporary respite. These concerns were fueled by poor performance in housing and auto sales in the final months of 1980, as well as a second wave of rising interest rates and stagnate unemployment rate.
1981–1982
As 1981 began, the Federal Reserve reported that there would be little or no economic growth in 1981, as interest rates were to continue rising in an attempt to reduce inflation. After failing to gain traction during the weak and brief recovery from the 1980 downturn, weakness in manufacturing and housing caused by rising interest rates began to have an expanded effect on related sectors beginning in mid-1981. Job losses resumed, this time expanding to nearly all employment sectors through the end of 1982.Unemployment had changed very little in the period between the end of the 1980 recession and the July 1981 start of the second, never dropping below 7.2%. Unemployment rose to double digits for the first time since 1941 in September 1982, and stood at a postwar high of 10.8% by the end of the year. The total increase in unemployment was 3.6%, which was less than the 1973–75 recession
1973–75 recession
The 1973–75 recession in the United States or 1970s recession was a period of economic stagnation in much of the Western world during the 1970s, putting an end to the general post-World War II economic boom. It differed from many previous recessions as being a stagflation, where high unemployment...
increase of 3.8%, yet still higher than the 2.9% average. Because the recession began with already elevated levels of unemployment, the increase easily pushed it higher than any other post-war recession. Overall, the recession caused the loss of 2.9 million jobs, representing a 3.0% drop in payroll employment, the largest percentage decline since the 1957–1958 recession
Recession of 1958
The Recession of 1958 was a sharp worldwide economic downturn in 1958, and the most significant one during the post-World War II boom between 1945 and 1970....
.
Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
, who had assumed office in January 1981, brought his own economic plan to the table. In August 1981, the president signed the Economic Recovery Tax Act of 1981, a three year tax cut plan. As the recession deepened in 1982, Reagan's approval rating also dropped. As a result, during the 1982 midterm elections, Republican
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
gains made in the House of Representatives
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
during the 1980 election were reversed. However, control of the Senate was retained by the Republicans.
Recovery
In July 1983, the official end of the recession was announced as November 1982, with the employment trough occurring in December. At the time of the announcement, output and sales had already met or exceeded levels achieved before the recession began. Through December 1983, nonfarm payrollsNonfarm payrolls
Nonfarm payroll employment is an influential statistic and economic indicator released monthly by the United States Department of Labor as part of a comprehensive report on the state of the labor market....
rose by 2.9 million and the unemployment rate fell by 2.5%. The auto industry had posted losses of $187 million in the third quarter of 1982, which turned into a gain of $1.2 billion during the same period in 1983. To prevent a new surge of inflation, interest and mortgage rates remained abnormally high throughout 1983, delaying a recovery in construction and housing.
A comparative analysis of the first six quarters of post-war economic recoveries published in the August 1984 issue of the Monthly Labor Review
Monthly Labor Review
The Monthly Labor Review is published by the U.S. Bureau of Labor Statistics. Issues often focus on a particular topic. Researchers outside of the BLS are welcome to submit articles.- History :...
indicated the 1983–1984 recovery was stronger than any post-war recovery since that of the 1953 recession
Recession of 1953
In the United States the Recession of 1953 began in the second quarter of 1953 and lasted until the first quarter of 1954. The total recession cost roughly $56 billion.-Preceding the Recession:...
. As the third year of recovery drew to a close in 1985, payroll employment had grown by 10 million since the end of the recession. Growth continued through July 1990, creating what was at the time the longest peacetime economic expansion in U.S. history.
Impact
Although the economy recovered in 1983, residual effects of the period of high inflation and high interest rates had a profound impact on the savings and loans industry. Savings and loan associations were limited by interest rate ceilings. As a result of rising interest rates, many savings and loan institutions experienced frequent account withdrawals, as depositors moved their money to higher earning accounts offered by commercial banks. The already struggling savings and loans industry posted large losses in both 1981 and 1982. High mortgage rates eroded the value of the primary asset of savings and loan associations, mortgage backed loans. These fixed rate loans were sold at a loss in order to balance withdrawals. This asset liability mismatchAsset liability mismatch
In finance, an asset–liability mismatch occurs when the financial terms of an institution's assets and liabilities do not correspond. Several types of mismatches are possible....
was identified as the primary cause of the savings and loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
.