Recessions
Definition Sustained declines in economic activity
lasting six months or longer
The recessions of the early 1980’s resulted in the highest un-
employment 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 sec-
ond began in July, 1981, and lasted through Novem-
ber, 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 im-
posed 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. Con-
sumer 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 con-
straints beginning in May, 1980. The decline in eco-
nomic 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 per-
cent 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 ef-
fect 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 infla-
tion, monetary policy remained restrictive. The com-
bination 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 auto-
mobiles. Consumer spending on such items as furni-
ture 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 mil-
lion people were unemployed. This level was 50 per-
cent more than in the third quarter of 1981 and
nearly double the number of unemployed at the be-
ginning 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 de-
cline was the result of easier monetary policy, some-
what 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 in-
dividual 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 fac-
tor, combined with lower interest rates, led the econ-
omy out of recession.
From 1983 through 1985, the economy experi-
enced substantial growth. Employment increased by
more than nine million, and business investment ex-
perienced 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 con-The Eighties in America Recessions 815