A 50-Year History of Recessions
History has a tendency to repeat itself, and because of that, it’s incumbent upon us to learn from it. The history of recessions in the US is no exception. And while it isn’t possible to smooth the natural ups and downs of the economy and prevent recessions altogether, we certainly can anticipate and prepare for them. As we’ve mentioned in previous posts, the economy is constantly expanding, peaking, contracting, or in a trough. And while it’s impossible to know exactly where we are in the economic cycle until the moment has passed, there are indications of the current state and signs of what’s on its way — if you know what to look for. By looking at historical recessions, we can analyze the variables that came together to create them. Look at enough of them, and you can see patterns.In this post, we’re going to look at a few recessions from the past half century. For a complete list of US recessions, check out this site.
A History of Significant Recessions in the Past 50 Years
The Great Recession - December 2007–June 2009
Anyone reading this post at the time of publication lived through the Great Recession. This was the longest recession since the Great Depression. A real doozy. The Great Recession lasted for 18 months, during which the GDP fell 4.3% and unemployment peaked at 9.5%. So, what caused it? In short, unscrupulous lending. With the housing market booming in the early 2000s and interest rates at record lows, banks engaged in rabid subprime lending, which means they took on a lot of high-risk loans. A lot of people who weren’t in a good position to repay their mortgage loans defaulted on them when the housing bubble burst and home values plummeted.People, corporations, mutual funds, and pension funds had invested in this debt in droves. So when mortgagees defaulted, a lot of people lost a lot of money. The damage spread, wreaking havoc on the economy as a whole. It took a huge government stimulus package, which included $700 billion to bailout the financial industry, to turn things around for the economy.
The Dot-Com Recession - March 2001–November 2001
Most of us remember the glorious technological flourishing of the late 90s — and the subsequent bust. The Dot-Com Recession was a relatively mild one, in which the GDP declined 0.3% and unemployment only reached 5.5%. Why did it happen?There’s no one reason, but rather a convergence of reasons: an over-inflated Nasdaq, which lost more than 75% of its value that year, the Enron scandal, and the Fed raising interest rates by more than 50%. It’s hard to say how long this recession could have gone on if the terrorist attacks of 9/11 hadn’t occurred. This tragedy prompted the Fed to continue cutting interest rates, which pulled the country out of recession. This led to record low interest rates, as low as 1% in 2003, which eventually led to the excessive subprime lending that landed the country in recession in 2008.
The Energy Crisis Recession - July 1981–November 1982
The Energy Crisis Recession, often referred to as part 2 of the Double Dip Recession, came hot on the heels of another recession just a year before. What started it all? Out of control inflation is the 70s. Inflation got as high as 22% in 1979. In order to correct this, the Fed raised interest rates, an act which caused the GDP to drop 2%, and sent the economy into a recession. In mid-1980, the Fed lowered rates again, pulling the country out of the recession. But inflation was still high, a problem that the Iranian oil embargo aggravated. The embargo drove up oil prices by reducing supply. By the end of 1980, the Fed raised interest rates to 19% due to inflation climbing up to 11.1%.This second part of the double dip recession lasted for 16 months, and saw the GDP shrink by 2.9% with unemployment peaking at 10.8%. It would take until mid-’83 for inflation to come back down to a more reasonable 5%.The following recovery would last through the remainder of the 80s, and is attributed to Reagan’s tax cuts, increased military spending, and the Fed lowering interest rates.
The Oil Embargo Recession - November 1973–March 1975
Most people remember this period of mile-long lines at the gas pumps and skyrocketing gas prices. OPEC’s oil embargo was prompted by the US’s support of the Israeli military, and cut our country’s oil supply drastically. As a result, gas was limited, prices at the pump shot up, the economy went into a recession that lasted for 16 months. When the price of oil went up, so did the prices of anything else that depends on oil. And as we’ve seen lately, that’s pretty much everything. Because consumers had to increase their spending on fuel, there was also less money to spend on other things. In efforts to reduce inflation, Nixon put freezes on wages and prices, an action which caused the global stock market to crash and resulted in the Dow Jones dropping by 45%. Additionally, the Fed raised interest rates, first to 10% in 1972, then to 13% in ‘74. At the end of ‘74, the Fed cut rates to 5.25%. The recession ended, replaced by stagflation — a strange economic condition in which the economy isn’t growing but inflation is still high. Fun stuff.
What do Recessions of History Have in Common?
If we look back over these examples, we see a trend — the Fed battling high inflation by raising interest rates. Sometimes this strategy puts the brakes on a little too hard, and the economy lurches to an abrupt crawl. This isn’t to say that the strategy isn’t effective. Perhaps at times, when applied with too much force, it’s almost too effective.
What can We Learn from Recessions in History?
We can learn to watch for the signs — high inflation, periods of unbridled growth, and the Fed raising interest rates. Sometimes the result is just a contraction, but sometimes the contraction lasts a little too long, resulting in recession. And when we know the signs, we can make sure we’re prepared for whatever comes. If you haven’t already done so, check out our posts on what you can do to make sure your finances are prepared in the event of a recession, or for the inevitable layoffs that accompany them. If you’d like to chat about the state of the economy, and get some expert eyes on your finances and investments to ensure you’re prepared for whatever economic stage we’re in, why not schedule a no-obligation call with us? We’ve been at this for nearly 30 years, through times of feast and famine. We’ve got the tools and knowhow to help you thrive in any economic environment. Reach out to us at info@nestfinancial.net. Find us on:LinkedIn Facebook Yelp TwitterDISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.