Recession of 1957-1958

The Event Sustained general decline in American business activity and consumer spending that lasted eight months

Date August, 1957-April, 1958

This most severe recession of the 1950’s caused the highest unemployment levels of the decade and alerted officials to the limitations of using fiscal and monetary policies to prevent economic downturns.

The 1957-1958 recession was the third recession that occurred in the United States after World War II. Although the decline in business activity was rapid, the length of the economic decline was relatively short, lasting only eight months.

The recession began in August, 1957 and ended in April, 1958. During this period industrial production dropped by 13.5 percent compared to 9 percent during the 1953-1954 recession. The unemployment rate doubled during the recession, but even after the recovery began in the spring of 1958, unemployment continued to rise, reaching a maximum level of 7.7 percent in August, 1958. This was the highest monthly unemployment rate experienced during the decade of the 1950’s.

Typically, a downturn in unemployment lags several months behind an upswing in production because employers are reluctant to recall laid-off workers until they are fairly certain that business conditions have improved. Moreover, normal growth in the labor force must be absorbed, and employees who were released during the recession period must be rehired.

During the 1957-1958 recession, gross national product declined 3.2 percent. However, disposable personal income changed little because of the impact of the automatic stabilizers such as unemployment insurance, which provided financial support to laid-off workers.

Affected Sectors

The recession did not affect all sectors of the economy uniformly. One of the hardest-hit sectors was the capital goods industry. Business expenditures on plant and equipment dropped by 16 percent. Consumer durables expenditures also declined, especially for automobiles. The manufacturing and goods-producing sectors were quantitatively more important during the 1950’s than in subsequent decades, and thus the decline in those sectors during this recession had a major impact on the overall economy. By contrast, the service sector was little affected by the recession.

Causes

The causes of the recession can be traced to the prosperity period of the mid-1950’s. Inflationary pressures began to develop during this time, and the level of inventories became very high. To prevent serious inflation, the Federal Reserve Board followed a highly restrictive monetary policy. Bank reserve requirements were raised, and the rediscount rate was increased on several occasions. These steps had the effect of moderating the rate of increase of economic activity in the 1956-1957 period.

One of the major factors leading to the decline both in production and, more broadly, in the gross national product was the liquidation of inventories. In the third quarter of 1957, inventories were being accumulated at a rate of more than $2 billion a year. However, during the first quarter of 1958, inventory liquidation reached an annual rate of $9.5 billion and continued at the relatively high level of $8 billion during the second quarter of that year. Inventory accumulation and liquidation played a major role in the movements of the business cycle during the 1950’s as techniques of inventory control were relatively imprecise compared to those of later decades.

A number of other casual factors also contributed to the 1957-1958 recession, including the decline in capital goods expenditures, particularly on plant and equipment. The latter had grown more rapidly than the overall increase in demand for goods and services, which led to excess capacity and the subsequent fall in business investment. Another cause of the recession was the changing composition of consumer expenditures. Proportionally less money was spent on durable goods and more on nondurables and services, thus causing some economic dislocation.

Shifts in foreign trade also affected the economy during the 1957 downturn. Exports of goods and services increased during the early part of 1957 because of the Suez Crisis in Egypt and the Middle East, which resulted in the short term closure of the Suez Canal and the attendant disruption of oil exports from that region. However, once the Suez Canal was reopened in 1958, U.S. oil exports declined as importers returned to their traditional sources of supply.

Finally, during 1956, the real money supply (adjusted for inflation) fell. As a result, interest rates rose as output increased. In 1957, the growth rate of total output began to decline, partly because of the tight monetary policy followed during the previous year. This had a negative impact, for example, on the growth of the housing industry as a result of reduced credit availability and higher monthly mortgage payments. Instead of adopting an easier monetary policy to stimulate the growth of output, the Federal Reserve policy remained restrictive, thus aggravating the 1957-1958 recession. In this case the monetary authorities seemed more concerned about preventing inflation than ameliorating the effects of the business cycle.

Recovery

Economic activity reached a low point in April, 1958, and then began to increase. The gains in production came in part from the ending of inventory liquidation in the last quarter of 1958 and because of some increase in inventories during the first quarter of 1959. In addition, a major force for recovery came from the consumer sector as expenditures increased on nondurable goods and services. As interest rates declined, increases in residential construction also occurred, and mortgage funds were made more readily available under Federal Housing Administration (FHA) and Veterans Administration (VA) programs.

The first half of 1959 was a period of strong economic recovery. However, the economy suffered a severe setback when the longest steel strike on record began during the summer. When the steel strike ended in October, 1959, the economy rebounded.

Higher government expenditures were important in stimulating economic activity. Federal government expenditures increased by almost $3 billion from the third quarter of 1957 to the third quarter of 1958, and state and local government expenditures increased by almost $4 billion. Moreover, tax receipts fell off sharply, and this factor, combined with increased spending, caused a federal deficit in 1959 of $12.4 billion. While this was the largest deficit in peacetime history, it also helped stimulate the recovery from the 1957-1958 recession.

Impact

The recession of 1957-1958 made economists and policy makers aware that the tools of monetary and fiscal policy alone were not capable of preventing severe economic downturns. Moreover, it alerted officials and consumers to the uneven pace of economic growth. In addition, the recession ushered in a protracted period of high unemployment that continued until 1965.

Bibliography

Hansen, Alvin. Business Cycles and Depressions. New York: Garland, 1997. A theoretical and empirical treatment of the causes and consequences of business cycles.

Ross, Arthur, ed. Unemployment and the American Economy. New York: John Wiley & Sons, 1964. A policy-oriented study of the unemployment problems created by the 1957-1958 recession.

Valentine, L. Business Cycles and Forecasting. 7th ed. Mason, Ohio: Southwestern, 1987. Presents methodologies for forecasting fluctuations in economic activity.

Vatter, Harold G. The U.S. Economy in the 1950’s: An Economic History. Westport, Conn.: Greenwood, 1984. Traces the important developments of the economic cycles during the 1950’s.