Recession of 1981-1982
The Recession of 1981-1982 is recognized as one of the most severe economic downturns in the United States following World War II, coming on the heels of a brief recession in 1980. Triggered by high inflation and rising interest rates—peaking at around 20 percent—the economy faced significant declines in consumer spending and industrial production. By the end of the recession in November 1982, unemployment had surged to twelve million, with marked increases in manufacturing and construction sectors. The downturn was characterized by a substantial drop in home construction and durable goods purchases, reflecting the tight credit conditions and high borrowing costs.
In response to the economic challenges, the Economic Recovery Tax Act was enacted in 1981, introducing substantial tax cuts aimed at stimulating disposable income and consumer spending. As inflation began to decline and monetary policy eased, the economy showed signs of recovery, with significant growth occurring from 1983 to 1985. The impact of this recession extended beyond economics, influencing political landscapes, as it contributed to shifts in presidential elections during that era. The recovery highlighted disparities in unemployment rates, with African American workers experiencing the most significant challenges during this period.
Recession of 1981-1982
Sustained declines in economic activity lasting six months or longer
The recessions of the early 1980’s resulted in the highest unemployment rates in forty years, causing millions of workers and their families to experience substantial declines in their standard of living.
There were two recessions during the 1980’s. The first occurred from January to July, 1980. The second began in July, 1981, and lasted through November, 1982. Following a period of little economic growth in 1979, overall economic activity declined in early 1980. Because of the high rate of increase in consumer prices (inflation), the Federal Reserve imposed severe restraints on the availability of credit. Partly as a result, interest rates rose rapidly to peaks of 14-20 percent in March and April, 1980. Consumer spending fell drastically and gross national product declined at a 10 percent annual rate in the second quarter of 1980. When the Federal Reserve became aware of the negative economic impact of very high interest rates, it removed the credit constraints beginning in May, 1980. The decline in economic activity came to an end in July, 1980, and for the remainder of the year retail sales (including automobile expenditures) and home construction gradually increased. Because the recession lasted for only six months, its overall impact was moderate. For example, industrial production declined 8.5 percent and unemployment rose by two percentage points. Of the seven post-World War II recessions up to that time, the 1980 recession had the smallest effect on the economy as a whole.
The recovery that began in August, 1980, was one of the shortest on record, lasting only eleven months. Because it was a relatively weak recovery, unemployment barely declined from the recession peak. Reaching a level of 7.8 percent in July, 1980, it had fallen only to 7.4 percent by July, 1981.
The rate of inflation remained above 10 percent in 1980 and early 1981. Partly because of high inflation, monetary policy remained restrictive. The combination of high inflation and restrictive monetary policy pushed the prime interest rate to 20 percent by spring, 1981, compared to 11 percent in mid-1980.
The high interest rates were responsible for a sharp decline in purchases of new homes and automobiles. Consumer spending on such items as furniture and household equipment (durable goods) as well as home construction is responsive to interest rates. These expenditure declines were major causes of the sixteen-month recession that began in July, 1981, and resulted in an increase in unemployment to the highest levels since 1941.
The 1981-1982 Recession
The second recession of the 1980’s was among the most severe of the post-World War II period. By November, 1982, twelve million people were unemployed. This level was 50 percent more than in the third quarter of 1981 and nearly double the number of unemployed at the beginning of the 1980 recession. Industrial production fell 12.5 percent during the 1981-1982 recession. Home construction in 1982 was 50 percent less than between 1977 and 1979, the most recent period of general prosperity.
By the fall of 1982, the prime rate of interest had fallen to just over 13 percent. The interest rate decline was the result of easier monetary policy, somewhat lower inflation, and a decline in demand for business and consumer loans. Moreover, in August, 1981, the Economic Recovery Tax Act became law. One major feature was a 25 percent reduction in individual income taxes consisting of a 5 percent cut in October, 1981, a 10 percent reduction in July, 1982, and a further 10 percent cut in July, 1983. The tax cut, plus increased government purchases of goods and services and the rise in transfer payments, led to substantial increases in disposable income. This factor, combined with lower interest rates, led the economy out of recession.
From 1983 through 1985, the economy experienced substantial growth. Employment increased by more than nine million, and business investment experienced the largest increase of any comparable period in the post-World War II period. Interest rates declined five percentage points from their peaks in 1981, and home mortgage rates were down by seven percentage points. Inflation was only about one-third of the level reached in the early 1980’s.
There were no periods of economic decline from 1985 to 1989. The next recession, a relatively mild one, did not occur until 1990-1991.
Impact
Frequently, a decline in economic activity has a political impact. For example, when President Jimmy Carter ran for reelection in 1980, the effects of the 1980 recession were still occurring. This contributed to Ronald Reagan’s victory over Carter in the 1980 presidential election. By contrast, when President Reagan ran for reelection against Walter Mondale in 1984, the economy was expanding vigorously and the 1981-1982 recession was a fading memory. This contributed to Reagan’s reelection.
The major economic impact of the 1980 and 1981-1982 recessions was the rise in unemployment, particularly in the manufacturing and construction industries. Manufacturing unemployment was 5.6 percent in 1979 and 12.3 percent in 1982, an increase of 6.7 points. In construction, unemployment rose from 10.3 percent in 1979 to 20.0 percent in 1982. Because most of the workers in these highly impacted industries were men, the female unemployment rate rose more slowly than the male rate from 1979 to 1982. Thus, for women the rate rose from 6.8 percent in 1979 to 9.4 in 1982. Among men, the rate rose from 5.1 percent in 1979 to 9.9 percent in 1982. Among all workers, African Americans suffered the greatest increase in unemployment. In 1979, the unemployment rate for African Americans was 12.3 percent; it rose to 18.9 percent in 1982 and 19.5 percent in 1983. For white workers, the unemployment rate was 5.1 percent in 1979, 8.6 percent in 1982, and 8.4 percent in 1983.
Bibliography
Glasner, David, ed. Business Cycles and Depressions: An Encyclopedia. New York: Garland, 1997. An exhaustive study of the history of business cycles and the economists who wrote about them.
Kurian, George, ed. Datapedia of the United States, 1790-2005. 2d ed. Lanham, Md.: Bernan Press, 2005. Extensive statistical information on the impact of business cycles. Contains important data not readily available elsewhere.
Samuelson, Paul, and William Nordhaus. Economics. 17th ed. New York: McGraw-Hill, 2001. Excellent discussion of the causes of business cycles. Written at a basic level.