Recession of 1990-1991

The Event U.S. economic contraction

Date Lasted from July, 1990, to March, 1991

Although the recession of 1990-1991, the only recession of the 1990’s, was considered to be mild in terms of its duration and the reduction in output experienced, President George H. W. Bush claimed that the Federal Reserve’s response to it was the reason that he was not reelected in 1992.

Market economies experience periods of economic expansion and contraction, often referred to as business cycles. Difficult to predict, these periods of economic contraction are called recessions. By common usage, a recession is said to occur if real gross domestic product (GDP) falls for two or more consecutive quarters. Real GDP is a measure of the market value of the output produced in a country that ignores the impact of inflation on prices, and a quarter is a three-month period of time. The National Bureau of Economic Research (NBER), the organization that assigns the beginning and ending dates to recessions, does not use this definition, instead defining a recession as “a significant decline in activity spread across the economy, lasting more than a few months,” which may be seen through a number of economic indicators, one being real GDP. A recession is said to have ended when the economy begins to expand.

The recession of 1990-1991 ended the second-longest period of economic expansion up to that point in the twentieth century and was followed by the longest period of economic expansion in U.S. history. At only eight months in length, the economic contraction of 1990-1991 was less than the average of nearly eleven months for the nine recessions that occurred during the twentieth century after 1945, and with a drop in real GDP of about 1.3 percent, the 1990-1991 recession recorded the second-lowest drop in real GDP among these nine recessions.

Cause of Recession

The causes of recessions are the subject of numerous disagreements, and the 1990-1991 recession is no exception. The disagreements arise as a result of differences in how economists view the workings of the economy. Since a recession occurs when the economy produces less output, this may result from two basic sources: one being that less output is demanded, causing producers to produce less, and the other being that producers supply less output as a result of a reduction in the availability of resources. John Maynard Keynes (1883-1946), the founder of macroeconomics, built his theory regarding the cause of recessions on a reduction in the demand for output. Although many economists have continued in this tradition, others have developed theories based on the role reduced supply plays in explaining recessions. While there is general agreement among economists that reductions in either the demand for output or the supply of output may lead to recessions, there is less agreement about which has led to a specific recession and what factors caused either a reduction in demand or a reduction in supply to occur.

These differing views can be seen in some of the explanations economists have offered for the cause of the 1990-1991 recession. Viewing a reduction in demand as the cause, some economists have argued that the recession may have been brought on by a reduction in consumer purchases due to concerns about the economy. Others suggest that a decline in demand for output may have been due to efforts by the Federal Reserve to reduce the growth of the money supply in the year prior to the recession. Still others argue that the increase in oil prices that accompanied Iraq’s invasion of Kuwait reduced the supply of output. As a result, no agreed-upon explanation has emerged regarding the cause of the 1990-1991 recession.

The Federal Reserve, the central bank of the United States, is responsible for monetary policy in the United States and as such often takes the lead in dealing with recessions. Under the leadership of Federal Reserve chairman Alan Greenspan, the Fed began taking steps to increase the money supply once there were signs that the economy was contracting. Increasing the money supply tends to lower interest rates and thereby increase the demand for output. President George H. W. Bush criticized these efforts as insufficient and cited them as the reason he was not reelected in 1992.

Impact

Effects of the recession can be seen in the impact that it had on the unemployment rate and wages during the early 1990’s. Just prior to the start of the recession, the June, 1990, unemployment rate was 5.2 percent. Over the course of the next two years, it reached a high of 7.8 percent in June, 1992. The economy did not achieve an unemployment rate of 5.2 percent again until August, 1996. The increase in the unemployment rate was accompanied by a slight reduction in average hours worked per week and wage rates that remained stagnant during the first several years of the decade.

While the 1990’s will be better remembered for its long uninterrupted period of economic growth, the 1990-1991 recession is a reminder that recessions are an inevitable part of market economies. Occurring between two of the longest periods of economic expansion in U.S. history, the 1990-1991 recession is often dismissed as a minor deviation from the slow but steady growth of the U.S. economy. Nevertheless, this recession, though mild in comparison to other post-World War II recessions, did adversely impact life in the United States.

Bibliography

Heilbroner, Robert, and Lester Thurow. Economics Explained. Rev. ed. New York: Touchstone, 1998. A concise overview of key economic concepts such as unemployment, inflation, and recessions and how they have affected society.

Knoop, Todd A. Recessions and Depressions: Understanding Business Cycles. Westport, Conn.: Praeger, 2004. A comprehensive look at recessions in the United States and a review of the difficulties encountered in trying to predict and prevent them.

Woodward, Bob. Maestro: Greenspan’s Fed and the American Boom. New York: Simon & Schuster, 2000. An engaging look at the workings of the Federal Reserve during the 1990’s under the guidance of Alan Greenspan.