What is economic contraction?

Definition and Examples of Economic Contraction

Economic contraction is a decrease in national production as measured by Gross Domestic Product (GDP). Economic contraction is accompanied by a decline in income and rising unemployment rates. It results in a loss of confidence and a slowdown in demand, often triggered by a specific event. However, the real cause precedes the well-publicized event. One of the major examples of recent economic contraction was the downturn caused by the COVID-19 pandemic, although there have been many contractions throughout the past century. Contraction ends when prices drop enough to attract renewed demand.

How Economic Contraction Works

Economic contraction causes a slowdown in demand due to a loss of confidence. An event, such as a correction or crash in the stock market, activates it. But the real cause precedes the well-publicized event. For example, the cause may be rising interest rates that reduce capital spending. Investors sell stocks, leading to lower prices and reduced funding for large companies. Companies cut spending and then lay off workers. Consumer spending dries up, resulting in further losses and job cuts. To understand this economic contraction, one must be aware of the reasons for business cycles, particularly the causes of recession. Contraction ends when prices fall enough to attract renewed demand. Central bank monetary policy and government fiscal policy can end contractions more quickly. They will lower interest rates and taxes, increase the money supply and spending. These policies are essential to the state’s strategies for providing the best solutions for unemployment.

Notable Economic Contractions

The 1920s

There were several economic contractions during the “Roaring Twenties.” The first contraction began in January 1920. One of the causes was the high top income tax rate of 73% on incomes over $1 million. Nearly 70% of federal revenue came from income taxes. In 1921, Warren Harding became president. Fortunately, the recession ended in July without any intervention.

Congress raised the corporate tax rate from 10% to 12.5%. An emergency immigration law was also passed to limit the number of immigrants to 3% of the population from 1910. In 1922, Harding lowered the top tax rate to 58%. In 1923, Calvin Coolidge, a Republican, became president. His approach was to lower the top tax rate again to 43.5%. The U.S. Supreme Court abolished the minimum wage for women in Washington, D.C.

The recession began in May 1922 but ended in July 1924. Despite the contraction, the stock market started a rise that lasted six years. It was fueled by speculation and leverage. Coolidge raised the top tax rate to 46%, then lowered it the following year to 25%.

Another contraction began in October 1926. It ended in November 1927, after the Federal Reserve lowered interest rates. Congress raised the corporate tax rate to 13.5%.

The 1930s: The Great Depression

The Great Depression was the largest economic contraction in U.S. history. It began in 1929, the year Herbert Hoover became president. He lowered the top income tax rate to 24%, and the top corporate tax rate to 12%.

But it was too late. The economy began to decline in August, signaling the start of the Great Depression. In September, stock prices rose, and they crashed on October 24.

The 1930s:

The 1940s

There were two recessions in the 1940s. Both were caused by the adjustment of disarmament after World War II. The government reduced the production of military arms. It took years for commercial production to be fully replaced.

The first recession occurred between February and October 1945, according to the National Bureau of Economic Research. It resulted in a decline in economic growth for that year by 1.0%. In 1946, it decreased by 11.6%. It fell by 1.1% in 1947.

The economy contracted again between November 1948 and October 1949. During that period, GDP decreased by 0.6% in 1949.

The 1950s and Beyond

In July 1953, the economy contracted for 10 months due to the end of the Korean War. Unemployment peaked in September 1954 at 6.1%. GDP contracted by 0.6% in 1954.

In August 1957, the economy contracted until April 1958. GDP fell by 0.75% in 1958. Unemployment peaked in September 1958 at 7.1%.

The economy began to contract in April 1960 for 10 months but recovered enough to achieve a growth rate of 2.6% for that year. The unemployment rate peaked at 7.1% in May 1961. President Kennedy ended the recession with stimulus spending.

From November 1973, the economy contracted until March 1975, but it was relatively mild. The economy shrank by 0.5% in 1974 and by 0.2% in 1975.

President Richard Nixon fought vigorously. He authorized the imposition of wage and price controls, which kept prices and wages very high. Consumers reduced demand. Companies laid off workers. Secondly, Nixon removed the U.S. dollar from the gold standard, leading to inflation. The price of gold rose to $120 per ounce, and the value of the dollar fell. His destructive policies created inflation and three consecutive quarters of contraction.

The recession in 1980 was the third worst economic contraction in U.S. history. It was difficult to overcome because there was also double-digit inflation. Contraction with inflation is referred to as “stagflation.” This was due to President Nixon’s economic policies. The Federal Reserve raised interest rates to 20% to combat inflation. This affected business spending and led to contraction.

The recession began in January 1980. It seemed to have ended within six months. In 1981, President Ronald Reagan took office. The Federal Reserve began lowering interest rates as inflation reached normal levels. However, contraction returned in July 1981 and lasted until November 1982. The economy contracted for six of the 12 quarters. This led to a decline in GDP of 0.3% in 1980 and 1.8% in 1982.

The unemployment rate increased to 10.8% in November 1982. It remained above 10% for 10 months.

Reagan reduced the top income tax rate from 70% to 28%. He also lowered the corporate tax rate from 48% to 34%. Despite his promise to reduce government spending, he increased spending instead. His expansionary fiscal policies ended the recession.

From July 1990, the economy contracted until March 1991. This was caused by the savings and loan crisis in 1989. The GDP of the United States was 0.1% in 1991.

In the recession of 2001, the economy contracted until November 2001. This was caused by the millennium bug which drove demand for computer equipment. This led to a subsequent boom and collapse. The situation was exacerbated by the 9/11 attacks. The economy contracted in two quarters: the first quarter by -1.1% and the third quarter by -1.7%.

In
In 2008, the Great Recession was the worst economic downturn in the United States since the Great Depression. The economy contracted by 0.1% in 2008 and by 2.5% in 2009. Once the Great Recession ended, a recovery began that lasted for 128 months, the longest in the history of business cycles in the United States dating back to 1854, and ended with the COVID-19 crisis in the spring of 2020. Markets then rose from the initial COVID crash, reaching new levels in the summer of 2021.

Source: https://www.thebalancemoney.com/economic-contraction-4067683