1990 Recession

Topics: Monetary policy, Recession, Public finance Pages: 5 (873 words) Published: April 27, 2014

1990-91 Recession

The 1990-91 recession, although milder than previous downturns, significantly affected the United States’ workforce. The 8 month long downturn, beginning in July of 1990 and ending in March of 1991, marked the end of our country’s longest peacetime expansion on record and had the lowest growth rate since the Great Depression (Gardner 3). Although the National Bureau of Economic Research concluded that the early 1990s recession lasted just eight months, conditions improved slowly even after, with unemployment reaching almost 8% as late as June 1992 (“1990-92 Early 1990s Recession”).

The recession of the early 90’s seemed to be caused by a number of possible factors. To begin, Iraq's invasion of Kuwait in August 1990 was the trigger, as it caused the worldwide increase in oil prices and caused a decrease in consumer confidence. Other statistics such as one from the first quarter of 1989 showing the output of the U.S. at 3.6 percent indicate that the economy had already been going downhill since before that time (Kamery 61).

The primary cause was the decrease in consumption, which a result of an increase in oil prices following the Persian Gulf War and partly because of a slowdown in the rate of population growth. Other factors contributed to the drop in aggregate consumption demand. For example, fiscal tightening by President Ronald Reagan’s Economic Recovery Tax Act of 1981 (ERTA) did not result in the intended “Laffer Curve” supply-side effect to negate its impact on the national budget (Hall 19). Therefore, the government found itself running unprecedented deficits without a need for fiscal stimulus. However, the Tax Reform Act of 1986 was an attempt to address the problem, but a cutback in fiscal stimulus was undesirable as well (19). Either way, Regan’s efforts affected consumption negatively and consumers felt the difference.

Other secondary reasons include technology, since the spread and popularity of credit cards caused consumers to build up excessive debt. Therefore, a reduced availability of credit without the necessary tightening of monetary policy by the Federal Reserve was definitely another probable cause of this recession. Lending constraints curtailed investments, which combined with poor investor sentiments, created the so-called “credit crunch” and contributed to the downturn of the economy (20).

The public’s negative outlook coupled with heavy debt incurred from the 1980’s spending spree did not allow for a speedy recovery of the recession. Thus there was little incentive to invest and therefore “new-home starts in the early 1990’s were at their lowest level since 1946 and auto sales fell to the lowers level since 1982” (Kramery 63).

Private investment decreased significantly more than consumption. Large inventory drawdowns by business were also a key component in the decline of GDP. However, as a percentage of GDP, the change in inventories was significantly smaller than that of past recessions. Therefore, it did not have much of an effect. The dollar depreciated by 7.3% in inflation-adjusted terms over the next year after peaking in March 1990 (Labonte 14) .

The trade deficit improved and helped improve the decline in GDP as well. The trade deficit declined from 0.9% of GDP in the second quarter of 1990 to 0.3% of GDP in the first quarter of 1991 (14). The trade deficit and dollar were able to decline partly due to the state of the global economy.

While past recoveries from recessions stemmed from factors like construction and auto sales, the Federal Reserve’s policy of lowering interest rates did not persuade consumers to borrow or spend. Monetary and fiscal policy did not seem to conflict during the recession because President George H.W. avoided fiscal policy action to stimulate the economy. More importantly, his Council of Economic Advisers, in the February 1992 report, argued that increases in fiscal expenditures or reductions...

Cited: Commercial Real Estate and the 1990-91 Recession in the United States. Massachusetts Institute of Techonology Department of Urban Studies and Planning. Web. 18 Mar. 2013. .
Hall, Robert E. "Macro Theory and the Recession of 1990-1991." AEA Papers and Proceedings: 275-79. Stanford. Web. 18 Mar. 2013. .
Kamery, Robert H. "A Brief View of the Recession of 1990-1991." Allied Academies International Conference 8.2 (2004): 61-65. Allied Academies International Conference. Web. 18 Mar. 2013. .
Labonte, Marc. " The Current Economic Recession: How Long, How Deep, and How Different From the Past?" CRS Report for Congress: 12-14. 10 Jan 2002. Web. 18 Mar. 2013. < http://fpc.state.gov/documents/organization/7962.pdf>.
U.S. President. 1992. Economic Report of the President (February).
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