The History of Recessions

Recessions are defined as two consecutive quarters of GDP contraction. Recessions are much more common than depressions – and much less serious.

What’s the history behind recessions? Which countries have gone through the worst recessions? When will a recession occur next? Today, we’re going to explain the history of recessions and help you determine when a recession may occur next in the future.

What is a Recession?

Before we can give you the history of recessions, we need to define what the term actually means – because the definition itself is an important part of history.

A recession is defined by the National Bureau of Economic Research (NBER) as “a significant decline in economic activity spread across the economy, lasting more than two quarters which is 6 months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales.”

In layman’s terms, it’s a period of 6 months during which a country’s economy declines.

A recession may sound bad – but they’re not always serious. Many view them as an inevitable part of economics. Just like commodity prices go up and down, so too will national GDPs.

By most counts, the United States has gone through 47 recessions over the years, although there’s some disputes about whether or not a few of those recessions really counted (unemployment and GDP weren’t really collected or standardized before World War II).

What Has Caused Recessions Throughout History?

As mentioned above, many people view recessions as an inevitable part of a complex global economy. Economies naturally go through ebbs and flows, and rises and falls.

With that in mind, recessions have been triggered by all sorts of different events throughout history. Generally, they occur due to a drop in spending (classified by economists as “an adverse demand shock”). A drop in spending can be triggered by things like:

• A financial crisis
• External trade shock
• Adverse supply shock
• Bursting of an economic bubble

How Have Governments Responded to Recessions Throughout History?

One of the most important jobs of any government is to appropriately respond to recessions. The conventional wisdom among governments is to spend your way out of a recession by investing in things like infrastructure. This is called “expansionist macroeconomic policy”, and includes strategies like:

• Increasing the money supply
• Increasing government spending
• Decreasing taxation

Types of Recessions

Recessions are not a black-and-white matter. They come in all different shapes, sizes, and forms. They can occur for all different reasons, and governments recover from recessions in different ways.

With that in mind, here are some of the common types of recessions that have taken place around the world:

• V-Shaped Recessions: This type of recession occurred in the United States in 1954 and 1991. V-shaped recessions are marked by short and sharp contractions followed by a fast and sustained recovery.
• U-Shaped Recession: U-shaped recessions indicate a prolonged slump in the economy, including a slower drop and a longer recovery.
• W-Shaped: Also known as “double dip recessions”, these recessions occur when the economy falls, begins to rise, and then falls into recession before rising out again. The United States experienced a W-shaped recession between 1980 and 1982.
• L-Shaped: These recessions occur when a short, sudden drop is followed by a sustained period of contraction. Japan had an L-shaped recession between 1997 and 1999, when it experienced contraction in 8 out of 9 quarters.

How Often Have Recessions Occurred Throughout History?

Up above, we mentioned that recessions take place periodically throughout history, and that it’s an inevitable part of most national economies.

The International Monetary Fund has found that “Global recessions seem to occur over a cycle lasting between eight and 10 years. Prior to 2009, the IMF defined a global recession as a global annual real GDP growth of 3.0% or less. After 2009, they changed their definition to a more complicated formula involving a decline in annual per-capita real world GDP (PPP-weighted) backed up by other macroeconomic indicators.

History of Global Recessions

Based on the IMF’s pre-2009 definition, the modern world has been through six periods of global recession, including:

• 1974 to 1975
• 1980 to 1983
• 1990 to 1993
• 1998
• 2001 to 2002
• 2008 to 2009

However, based on the IMF’s post-2009 definition, the global economy had experienced just four global recessions in modern times (since the end of World War II). Those recessions included:

• 1975
• 1982
• 1991
• 2009

All of these global recessions only lasted one year, although there’s some debate that the 1991 global recession lasted an additional 6 months.

History of Recessions in the United States

We mentioned earlier than the United States has been through around 50 recessions over its history, although there’s some controversy over recessions in America’s early history.

Here’s a brief overview of the recessions America has been through over the years.

Recessions in America’s Early History (1785 to 1834)

America experienced a total of 11 recessions between the years 1785 and 1834, including all of the following:

• Panic of 1785: This recession lasted for 4 years and ended the business boom that followed the American Revolution. The recession is generally traced back to overexpansion along with a buildup of debts that had occurred after the victory at Yorktown. Postwar deflation, manufacturing competition from Europe, and lack of a solid currency also played a role.
• Copper Panic of 1789: Widespread counterfeiting of copper coins led to an American recession lasting 4 years, between 1789 and 1793.
• Panic of 1796-97: As you can see, America’s early recessions were all categorized as periods of “panic”. The Panic of 1796-97 was a result of widespread deflation in the Bank of England, which crossed the Atlantic and caused major financial panic in America. Interestingly, the South largely escaped this panic.
• 1802 to 1804 Recession: This recession occurred after a boom of war-time activity. It culminated in the First Barbary War, a war against pirates designed to combat the plummeting commodity prices.
• Depression of 1807: This three year recession occurred as a result of the Embargo Act of 1807, which led to falling trade volumes, commodity prices, and securities prices.
• 1812 Recession: America experienced a brief recession at the beginning of 1812. The recession ended quickly as the United States ramped up production towards the end of the year as it entered the War of 1812 (which began in June).
• 1815 to 1821 Depression: This recession turned into a lengthy depression. It started in 1815 after the value of bank notes rapidly depreciated. After a brief period of recovery, the Panic of 1819 derailed recovery efforts, leading to widespread economic pain across the growing nation.
• 1822 to 1823 Recession: Just as the 1815 to 1821 Depression appeared to be over, America went through another recession after commodity prices peaked.
• 1825 to 1826 Recession: This recession was caused by the Panic of 1825, which was a stock market crash fueled by excessive speculation in Latin American colonies and their value.
• 1828 to 1829 Recession: Trade decline was blamed for this recession, as England banned America from trading with English colonies in 1826.
• 1833 to 1834 Recession: The US economy declined moderately between 1833 and 1834, although America experienced rapid expansion afterwards.

The Free Banking Era (1834 to 1873)

The “Free Banking Era” is where America’s recession history gets murky. During this period, GDP and unemployment statistics were not gathered, which is why economists rely on other statistics to indicate a recession.

Depending on who you ask, America went through anywhere from 5 to 10 recessions between the 1830s and early 1900s. Few of these recessions – with the exception of the Panic of 1857 and the Panic of 1873 (also called the “Long Depression”) were very serious in terms of having long-lasting effects on the US economy.

Early 1900s and World War I

America went through a handful of recessions in the early 1900s, including the Panic of 1907 and the Panic of 1910, the second of which was essentially just a minor slowdown in a burgeoning US economy.

Just before World War I, America experienced a significant decline in real incomes called the Recession of 1913-1914. This recession didn’t end until the outbreak of World War I, when America’s production ramped up to meet Europe’s rising demand.

Like many countries, America went through another recession after World War I. Rampant hyperinflation was occurring throughout Europe, and the global economies experienced a shock after the sudden decline in military production caused by the end of the war. America’s post-WW1 recession lasted from August 1918 to March 1919.

Throughout the 1920s, America went through three more brief recessions, including the Depression of 1920-21, the 1923-24 recession, and the 1926-27 recession, culminating in the Great Depression of the 1930s.

The Great Depression

During the infamous Great Depression, America’s GDP fell 27%. To put that number in perspective, America’s GDP fell 3.9% in 2007, which was the biggest drop since the Great Depression.

1 in 4 working Americans was unemployed, which was another record low in modern history (for perspective, the highest unemployment rate since the Great Depression was 10.8% in 1981 to 1982).

The Great Depression lasted nearly 4 years as stock markets plummeted around the world. It wasn’t until the outbreak of World War II that the Great Depression was officially over.

America’s Modern Recession History

America experienced brief recessions in 1949, 1953, 1958, 1961, and 1969, none of which had a long-term impact on the flourishing US economy.

1973-1975 Recession: The first significant recession in the post-WWII era occurred between 1973 and 1975, when OPEC quadrupled oil prices. This, combined with high American spending on the Vietnam War, led to stagflation across America, during which rising unemployment coincided with rising inflation.

1980 Recession: Another brief recession occurred in 1980, although it was one of the shortest recessions in American history. This was related to the “Volcker Shock,” where Federal Reserve Chairman Paul Volcker implemented high interest rates to combat inflation.

1981-1982 Recession: The early 1980s saw another significant recession, characterized by high unemployment and high interest rates, continuing the Federal Reserve’s efforts to control inflation.

1990-1991 Recession: This recession was caused by a combination of factors, including the savings and loan crisis, reduced defense spending following the end of the Cold War, and rising oil prices due to the Gulf War.

2001 Recession: The 2001 recession was primarily triggered by the burst of the dot-com bubble, leading to significant losses in technology stocks. The economic impact was further exacerbated by the September 11 terrorist attacks, which caused widespread uncertainty and a temporary halt in economic activities.

2007-2009 Great Recession: The most severe recession since the Great Depression, the Great Recession was triggered by the collapse of the housing market and the ensuing financial crisis. Key factors included subprime mortgage lending, the failure of major financial institutions, and a subsequent global credit crunch. The recession led to significant job losses, a substantial decline in household wealth, and prolonged economic stagnation. Government interventions, including the Troubled Asset Relief Program (TARP) and the American Recovery and Reinvestment Act (ARRA), were implemented to stabilize the economy.

2020 COVID-19 Recession: The most recent significant recession was caused by the global COVID-19 pandemic. The pandemic led to widespread lockdowns, business closures, and disruptions in global supply chains, causing a sharp contraction in economic activity. The US government responded with unprecedented fiscal and monetary measures, including stimulus checks, enhanced unemployment benefits, and the Paycheck Protection Program (PPP), to support individuals and businesses.

Current Economic Outlook (2024):

• Inflation and Interest Rates: As of 2024, the US economy is dealing with inflationary pressures, prompting the Federal Reserve to carefully adjust interest rates to balance growth and inflation.
• Technological Advancements: The rapid advancement of technology continues to drive economic growth, particularly in sectors like artificial intelligence, renewable energy, and biotechnology.
• Labor Market: The labor market remains dynamic, with ongoing challenges related to workforce automation, remote work trends, and skills mismatches.
• Global Economic Factors: Global trade tensions, geopolitical uncertainties, and climate change are influencing economic policies and business strategies, adding complexity to the economic landscape.

While the US economy continues to face challenges, it remains resilient, adapting to new economic realities and leveraging innovation to drive future growth.

The Great Recession (2007 to 2009)

The last major recession in American history (and most of global history) was the so-called “Great Recession”, which officially took place between December 2007 and June 2009.

Just like with the Great Depression, you could write a book on the causes and consequences of the Great Depression. Most of it is outside the scope of this article.

Suffice to say that the Great Recession was caused by the subprime mortgage crisis and the ensuing collapse of the US housing bubble, and the aftershocks that caused across the global economy. After a $700 billion bailout for the banks and a $787 billion fiscal stimulus package, the recession finally ended in June 2009.

History of Recessions Around the World

The Great Recession, listed above, started in America but reverberated around the world, with most countries worldwide experiencing the effects of that recession in some form or another.

The same can be said for the Great Depression of the 1930s. That too started in America before tracing its effects around the world.

As the global economy has become more and more intertwined, so too have our recessions. When one major country experiences a recession, it can often be traced back to problems in another country.

Nevertheless, here are some other notable recessions that have taken place throughout history:

Australia in the 1930s

Australia had the worst recession in its entire history at the beginning of the 1930s. The recession was traced back to 1920s profit issues in agriculture and cutbacks, leading to a major recession between 1931 and 1932.

Although this was the worst recession in Australia’s history, the recession still put Australia ahead of most other nations in the early 1930s dealing with the aftereffects of the Great Depression.

The United Kingdom

The UK has gone through several major recessions throughout its modern history. It most recently suffered from the Great Recession of 2007 to 2008, which ended up being the deepest recession in the United Kingdom since the Second World War.

Previously, the UK had experienced one of its longest recessions in 1812 and 1821, during the so-called Post-Napoleonic Depression.

Other notable depressions in UK history included the Long Depression (which we mentioned in the history of US depressions above) as well as the Great Depression of the early 1930s.

Since the end of the Second World War, the UK has experienced recessions in 1956, 1961, the mid-1970s, early 1980s, and the early 1990s, all of which can be traced back to some of the economic activities we mentioned above (including the Volcker Shock, OPEC’s oil embargo, and the US savings and loan crisis of the early 1990s, all of which crossed the Atlantic to affect the UK economy).

Notably, the UK avoided the downturn the US experienced after the dot com bubble burst in the early 2000s.

When Will the Next Recession Take Place?

After the 2007-08 recession, there was concern about whether the global economy was undergoing a “double dip” or “W-shaped” recession. The global economy experienced volatility in consecutive quarters for a number of years but officially avoided entering another recessionary period until the COVID-19 pandemic in 2020 caused a sharp, albeit brief, economic downturn.

Current Economic Concerns:

1. Post-Pandemic Recovery:

• The global economy has been recovering from the impacts of COVID-19, but this recovery has been uneven across different regions and sectors. Supply chain disruptions, labor shortages, and inflationary pressures have created ongoing challenges.

2. Inflation and Interest Rates:

• As of 2024, inflation remains a significant concern, prompting central banks, including the Federal Reserve, to adjust interest rates to control rising prices. These adjustments can influence economic growth and potentially trigger recessions if not managed carefully.

3. Geopolitical Tensions:

• Ongoing geopolitical tensions, such as the conflict in Ukraine, trade disputes, and international sanctions, have added uncertainty to the global economic outlook, impacting markets and economic stability.

4. Technological Disruptions:

• Rapid technological advancements continue to reshape industries and labor markets. While innovation drives growth, it can also lead to job displacement and require significant economic adjustments.

5. Climate Change:

• The increasing frequency of extreme weather events and the transition to a green economy present both risks and opportunities. Investments in sustainability are critical, but they also come with economic costs and uncertainties.

Predicting the Next Recession:

The complex nature of global economics means that predicting the next recession with precision is challenging. Economists and analysts use various indicators to forecast potential downturns, but many factors can influence these predictions:

1. Economic Indicators:

• Yield Curve Inversion: An inverted yield curve, where short-term interest rates exceed long-term rates, has historically been a predictor of recessions.
• Consumer Confidence: Declines in consumer confidence can signal reduced spending and economic slowdown.
• Unemployment Rates: Rising unemployment rates can indicate economic distress.

2. External Shocks:

• Pandemics: The COVID-19 pandemic demonstrated how global health crises could quickly lead to economic downturns.
• Natural Disasters: Major natural disasters can disrupt economies, particularly in regions heavily impacted by climate change.
• Political Instability: Political upheavals and conflicts can lead to economic uncertainty and reduced investment.

Global Interdependence:

One certainty about the future of recessions is that no country is completely insulated from global economic dynamics. The interconnectedness of the global economy means that economic booms and busts are often shared across borders. Countries must navigate these cycles together, with coordinated efforts to stabilize economies and support growth.

While the exact timing of the next recession is unknown, understanding the factors that contribute to economic downturns can help in preparing for and mitigating their impacts. Continuous monitoring of economic indicators, geopolitical developments, and technological trends will be essential in anticipating and responding to future economic challenges. The resilience of economies will depend on their ability to adapt to changing conditions and maintain robust financial and social systems.