US Recessions Throughout History: Causes and Effects

A recession denotes a significant, persistent, and widespread contraction in economic activity. The U.S. has suffered 14 official recessions since the Great Depression and other countries experience them as well, making clear such downturns are a recurring feature of the economic landscape.

Since economies tend to grow most of the time, a recession and the economic hardships it inflicts are big news and a departure from the economy's usual expansionary mode. Recessions have grown increasingly infrequent over the past 40 years, possibly because policymakers have gained a better understanding of their causes. Between 1960 and 2007, 21 advanced economies were in recession 10% of the time, according to the International Monetary Fund.

What's a Recession?

Recessions are sometimes defined as two consecutive quarters of decline in real Gross Domestic Product (GDP), which measures the combined value of all the goods and services produced in an economy.

In the U.S., the National Bureau of Economic Research (NBER) defines a recession as "a significant decline in economic activity that is spread across the economy and lasts more than a few months." The NBER dates recessions based on indicators including GDP, payroll employment, personal income and spending, industrial production, and retail sales.

Surveying Past U.S. Recessions

Let's take a look at all official U.S. recessions since the Great Depression, focusing on common measurements of their severity as well as causes.

• Duration: How long did the recession last, according to NBER?
• GDP decline: How much did economic activity contract from its prior peak?
• Peak unemployment rate: What was the maximum proportion of the workforce left jobless?
• Reasons and causes: What unique historical circumstances contributed to the recession?

The Own Goal Recession: May 1937–June 1938

• Duration: 13 months
• GDP decline: 10%
• Peak unemployment rate: 20%
• Reasons and causes: Expansionary monetary and fiscal policies had secured a recovery from the Great Depression after 1933, albeit an uneven and incomplete one. In 1936-1937 policymakers changed course, more preoccupied with cutting budget deficits and heading off inflation than with the dangers of a depressive relapse. Following a tax increase in 1935 and Social Security payroll deductions starting in 1937, the budget deficit shrank from 5.4% of GDP in 1936 to 0.1% of GDP by 1938. Meanwhile, the Federal Reserve in 1936 doubled the reserve requirement ratios for banks, thus curbing lending with the stated aim of preventing "an injurious credit expansion." Perhaps most damaging of all, the U.S. Treasury began the same year to sterilize gold inflows, ending brisk money supply growth that had supported the expansion. Industrial production began falling in September; it would decline 32% in the course of the recession. The stock market crashed in October. The recession ended after policymakers rolled back the increase in reserve requirements and gold sterilization as well as fiscal austerity.

The V-Day Recession: February 1945–October 1945

• Duration: Eight months
• GDP decline: 10.9%
• Peak unemployment rate: 3.8%
• Reasons and causes: The 1945 recession reflected massive cuts in U.S. government spending and employment toward the end and immediately after World War II. Federal spending fell 40% in 1946 and 38% in 1947 while the private sector's output grew rapidly. The severity of the downturn remains open to question because much of the eliminated spending represented wartime production that did not serve to increase living standards. The elimination of price controls in 1946 artificially depressed output as adjusted for inflation, while the unemployment rate remained low in part because women left the workforce in large numbers (and often unwillingly).
  

The Post-War Brakes Tap Recession: November 1948–October 1949

• Duration: 11 months
• GDP decline: 1.7%
• Peak unemployment rate: 7.9%
• Reasons and Causes: The first phase of the post-war boom was in some ways comparable to the economic recovery from the COVID-19 pandemic. Amid a backlog of consumer demand suppressed during the war and a shortage of production capacity, the collapse of wartime price controls fueled an abrupt surge of inflation by mid-1946. The annualized inflation rate rose from 3.3% in June 1946 to 11.6% two months later and 19% at its peak in April 1947. Policymakers only responded in the second half of 1947, and when they did their efforts to tighten credit ultimately led to a relatively mild recession as consumers and producers retrenched.

The M*A*S*H* Recession: July 1953–May 1954

• Duration: 10 months
• GDP decline: 2.7%
• Peak unemployment rate: 5.9%
• Reasons and causes: The wind-down of the Korean War caused government spending to decline dramatically, lowering the federal budget deficit from 1.7% of GDP in fiscal 1953 to 0.3% a year later. Meanwhile, the Federal Reserve tightened monetary policy in 1953.

The Investment Bust Recession: August 1957–April 1958

• Duration: Eight months
• GDP decline: 3.7%
• Peak unemployment rate: 7.4%
• Reasons and causes: The end of the Korean War unleashed a global investment boom marked by a surge in exports of U.S. capital goods. The Fed responded by tightening monetary policy as the inflation rate rose from 0.4% in March 1956 to 3.7% a year later. Fiscal policy focused on limiting budget deficits produced a surplus of 0.7% of GDP in 1957. The 1957 Asian Flu pandemic killed 70,000 to 100,000 Americans in 1957, and industrial production slumped late that year and early in 1958. The dramatic drop in domestic demand and evolving consumer expectations led to the failure of the Ford Edsel, the beginning of the end for Detroit's auto industry dominance. The sharp worldwide recession contributed to a foreign trade deficit. The recession ended after policymakers eased fiscal and monetary constraints on growth.

The 'Rolling Adjustment' Recession: April 1960–February 1961

• Duration: 10 months
• GDP decline: 1.6%
• Peak unemployment rate: 6.9%
• Reasons and causes: This relatively mild recession was named for the so-called "rolling adjustment" in U.S. industrial sectors tied to consumers' diminished demand for domestic autos amid growing competition from inexpensive imports. Like most other recessions, it was preceded by higher interest rates, with the Fed increasing the federal funds rate from 1.75% in mid-1958 to 4% by the end of 1959. Fiscal policy also tightened at the end of President Dwight Eisenhower's second term, from a deficit of 2.6% of GDP in 1959 to a surplus of 0.1% a year later.

The Guns and Butter Recession: December 1969–November 1970

• Duration: 11 months
• GDP decline: 0.6%
• Peak unemployment rate: 5.9%
• Reasons and causes: Military spending increased in the late 1960s amid growing U.S. involvement in the Vietnam War and alongside high expenditures on domestic policy initiatives. As a result, the federal budget deficit rose from 1.1% of GDP in 1967 to 2.9% in 1968, while inflation increased from 3.1% in 1967 to 4.3% a year later and 5.3% by 1970. The Federal Reserve increased the federal funds rate from 5% in March 1968 to more than 9% by August 1969. By early 1971, the Fed had lowered the federal funds rate back below 4%, aiding the recovery.

The Oil Embargo Recession: November 1973–March 1975

• Duration: 16 months
• GDP decline: 3%
• Peak unemployment rate: 8.6%
• Reasons and causes: This long, deep recession began following the start of the Arab Oil Embargo, which would quadruple crude prices. That tipped the balance for an economy struggling with the devaluation of the dollar amid high U.S. trade and budget deficits and slipping domestic crude output. The collapse of the Bretton Woods Agreement fixing currency exchange rates contributed to a rise in U.S. inflation from 2.4% in August 1972 to 7.4% a year later, causing the Fed to double the federal funds rate to 10% between late 1972 and mid-1973. After increasing the federal funds rate to 13% in the first half of 1974, the Fed cut it to 5.25% in under a year. Inflation and unemployment remained elevated after the recession ended, ushering in stagflation. Unemployment reached 9% in May of 1975, after the declared end of the recession.

The Iran and Volcker Recession, Part 1: January 1980–July 1980

• Duration: Six months
• GDP decline: 2.2%
• Peak unemployment rate: 7.8%
• Reasons and causes: Accommodative monetary policy aimed at alleviating rising unemployment pushed U.S. inflation to 7% by early 1979, just before the Iranian Revolution caused oil prices to double. The Federal Reserve was already raising rates when Paul Volcker was named Fed chair in August 1979, and the rate went from 10.5% at the time of his appointment to 17.5% by April 1980. This short recession formally ended as the Fed dropped the fed funds rate back down to 9.5% by August of 1980, but inflation stayed high and the Volcker Fed wasn't done.

Part 2 of Double-Dip Recession: July 1981–November 1982

• Duration: 16 months
• GDP decline: 2.9%
• Peak unemployment rate: 10.8%
• Reasons and causes: By the fourth quarter of 1980 inflation was up to 11.1%, prompting the Federal Reserve to raise the fed funds rate to 19% by July 1981. As the downturn worsened and joblessness climbed, Volcker resisted repeated demands in Congress to change course. By October 1982 inflation had declined to 5%, while unemployment would remain above 10% until mid-1983. Most economists today accept Volcker's arguments at the time that failure to control inflation and restore the Fed's credibility would have led to continued economic underperformance.

The Gulf War Recession: July 1990–March 1991

• Duration: Eight months
• GDP decline: 1.5%
• Peak unemployment rate: 6.8%
• Reasons and causes: This relatively mild recession began a month before Iraq invaded Kuwait, and the resulting oil price shock may have contributed to a frustratingly lackluster recovery. The Fed had raised the federal funds rate from 6.5% in February 1988 to 9.75% in May 1989 in an effort to contain inflation, which rose from 2.2% in 1986 to 3.9% for 1990.

The Dot-Bomb Recession: March 2001–November 2001

• Duration: Eight months
• GDP decline: 0.3%
• Peak unemployment rate: 5.5%
• Reasons and causes: The collapse of the dotcom bubble contributed to one of the mildest recessions on record following what was then the longest economic expansion in U.S. history. The Fed raised the fed funds rate from 4.75% in early 1999 to 6.5% by July 2000. The Sept. 11 attacks and the associated economic disruptions may have hastened the recession's end by encouraging the Fed to keep cutting the fed funds rate. The benchmark rate reached a low of 1% by mid-2003.

The Great Recession: December 2007–June 2009

• Duration: Eighteen months
• GDP decline: 4.3%
• Peak unemployment rate: 9.5%
• Reasons and causes: The nationwide downturn in U.S. housing prices triggered a global financial crisis, a bear market in stocks that had the S&P 500 down 57% at the lows, and the worst economic downturn since the recession of 1937-38. Global investment flows into the U.S. had kept market rates low, likely encouraging unscrupulous mortgage underwriting and mortgage-backed securities marketing practices. Oil prices spiked to record highs by mid-2008 and then crashed, depressing the U.S. oil industry. Dropping oil and commodity prices led to deflation and strained the U.S. economy.

The COVID-19 Recession: February 2020–April 2020

• Duration: Two months
• Reasons and causes: The COVID-19 pandemic spread to the U.S. in March 2020, and the resulting travel and work restrictions caused employment to plummet, triggering an unusually short but sharp recession. The unemployment rate climbed from 3.5% in February 2020 to 14.7% in April 2020 but was back below 4% by the end of 2021, capped by $5 trillion in pandemic relief spending. In addition, quantitative easing by the Federal Reserve expanded its balance sheet from $4.1 trillion in February 2020 to nearly $9 trillion by the end of 2021, complementing a federal funds rate that remained near zero until March 2022.
  

The Bottom Line

As the history of recessions over the past century suggests, they're almost always preceded by monetary policy tightening in the form of rising interest rates. Fiscal contractions, whether they involve lower government spending, higher taxes, or both, have also played a role.

This is not to automatically deprecate such policies when they lead to a recession. In some cases, as during the 1970s, the long-run alternative to immediate economic pain may be even less palatable. In others, as with the end of World War II and the Korean War, there may be no easy way or no will to find immediate alternatives to high military spending.

That doesn't change the fact that most modern recessions have occurred in response to some combination of rising interest rates, lower budget deficits, and higher energy prices.