The Great Recession

The Great Recession, which lasted from 2007 to 2009, was the longest and deepest economic downturn in US history since the Great Depression. Over 8 million jobs were lost and persistently high unemployment and lengthy joblessness dominated the recession and its protracted recovery.

Stagnant incomes for all but the wealthiest Americans meant an increased demand for credit, fueling the growth of an unsustainable credit bubble. Bank deregulation allowed financial institutions to create new exotic products in which the ever-richer rich could invest. The result was a bubble-based economy that came crashing down in late 2007.

During the Great Recession of 2007–2009, the world witnessed one of the deepest and most extensive economic downturns in recent history, characterized by synchronous crises in the global financial system, employment (e.g., unemployment rose to 10% in the United States and the Europe Union, and the housing market (e.g., over 15% of U.S. mortgages were either delinquent or in foreclosure by 2010.

After remaining relatively constant for much of the post-war era, the share of total income accrued by the wealthiest 10 percent of households jumped from 34.6 percent in 1980 to 48.2 percent in 2008.  Much of the spike was driven by the share of total income accrued by the richest 1 percent of households. Between 1980 and 2008, their share rose from 10.0 percent to 21.0 percent, making the United States as one of the most unequal countries in the world.

The Great Recession has been marked by extraordinary contractions in output, investment and consumption. Mirroring these developments, per capita employment and the labor force participation rate dropped substantially and by 2014 showed little sign of improving. The unemployment rate had declined from its Great Recession peak. But, this decline primarily reflected a sharp drop in the labor force participation rate, not an improvement in the labor market.

An economic bubble occurs when “trade is in high volumes at prices that are considerably at variance with intrinsic values.” There was unusual growth and falloff in demand for housing and an unprecedented rise and decline in real home prices; behavior indicative of a bubble. Although the rise in demand in the U.S housing market that occurred through 2005 is now widely referred to as a bubble, when this bubble began is not yet apparent.

The low interest rates set by the Federal Reserve over the following few years after teh September 11th attack provided incentive for home buying. The increase in the foreclosure rate in the 2006–2007 period that ultimately led to the collapse of the subprime mortgage market and the 2008 economic downturn. As the 2000s unfolded, economic growth and public policies designed to increase homeownership led to a housing boom. By 2006, the “housing bubble” began to burst. In late 2007, the economy fell into recession. The housing market continued to soften, people began to lose their jobs, and the banking industry was in crisis. The sharp decline in home values in many industrialized and developing countries was one of the most evident facets of the global economic recession of 2008.

clinically diagnostic psychiatric data was largely consistent with studies of psychological distress. The most rigorous studies (i.e., those that used representative data and controlled for secular trends) reported that the prevalence of clinically diagnosable depression and anxiety significantly increased in the U.S., Europe, and East Asia during the immediate aftermath of the Great Recession.

Availability of subprime credit and discriminatory lending also led to higher foreclosure rates for Non-Hispanic blacks (NHB) and Hispanics and in poor and minority communities. The housing crisis appears to have had a detrimental impact on mental health—above and beyond impacts related to unemployment or financial strain—particularly in the U.S. Findings indicated that both personal and community-level experiences of foreclosure or housing strain were associated with increases in psychological distress and suicide rates.

A general slowdown in economic activity, a downturn in the business cycle, a reduction in the amount of goods and services produced and sold—these are all characteristics of a recession. According to the National Bureau of Economic Research (the official arbiter of US recessions), there were 10 recessions between 1948 and 2011. The most recent recession began in December 2007 and ended in June 2009, though by 2012 many of the statistics that describe the U.S. economy had yet to return to their pre-recession values.

During the recovery of the 1990s under President Clinton, middle-class incomes grew at a healthy pace. However, during the jobless recovery of the 2000s under President Bush, that trend reversed course.    Middle-class incomes continued to fall well into the recovery, and never regained their 2001 high. The first year of the Great Recession dealt a sharp blow to middle-class families, who had not yet recovered from the pain of the last recession.

Severe income inequality may make the economy more vulnerable to a deep recession.  In the case of the Great Recession, income inequality fueled economic instability in two ways. First, stagnant middle-class incomes meant increased demand for credit, fueling an unsustainable bubble. Second, the ever-richer rich amassed increasing sums of money to invest in new financial products. Bank deregulation allowed for the development of exotic financial instruments, and the collapse of this house of cards instigated the Great Recession.

Growth in debt-to-income was particularly sharp during the jobless recovery of the 2000s, as middle-class families’ incomes remained stagnant and borrowing skyrocketed. That expansion of lending to middle- and low-income households created a boom in consumption and fueled the economic growth of the early 2000s. But it was not sustainable, and the collapse of the housing market was the result of households across the United States bearing levels of debt with incomes that simply could not keep pace. Ultimately, excessive borrowing on the part of those left behind as the rich grew richer helped spark the housing bubble whose implosion helped trigger the start of the Great Recession.   

One of the most widely recognized indicators of a recession is higher unemployment rates. In December 2007, the national unemployment rate was 5.0 percent, and it had been at or below that rate for the previous 30 months. At the end of the recession, in June 2009, it was 9.5 percent. In the months after the recession, the unemployment rate peaked at 10.0 percent (in October 2009). Before this, the most recent months with unemployment rates over 10.0 percent were September 1982 through June 1983, during which time the unemployment rate peaked at 10.8 percent.

Unemployment rates of Blacks or African Americans and Hispanics or Latinos historically have been higher than the rate for Whites.In the months during and after the recent recession, unemployment rates for Blacks or African Americans and Hispanics or Latinos remained below the peaks they reached in 1982 and 1983, while the unemployment rate of Whites was very comparable to that of 1983. For many years, men's unemployment rates were generally lower than women's both during and between recessions. However, since the early 1980s, men's unemployment rates had been higher than women's during or immediately after recessions, and the rates for men and women had been quite similar in other periods. Higher unemployment among men was especially notable during and immediately after the recent recession.

The employment decline experienced during the December 2007–June 2009 recession was greater than that of any recession of recent decades. Forty-seven months after the start of the recession that began in November 1973, for example, employment was more than 7 percent higher than it had been when the recession started. In contrast, 47 months after the start of the most recent recession (November 2011), employment was still over 4 percent lower than when the recession began.

An often-discussed topic regarding the Great Recession is its effects on millennials. The recession caused them to defer decisions about home and car purchases and also marriage. The decisions millennials make now in the aftermath of the recession’s effects can reverberate for years. In “The economic plight of millennials” (Federal Reserve Bank of Atlanta, EconSouth, January–April 2014), author Mark Carter looks at the financial hardships facing millennials.

Millennials—defined as people born after 1980—are straying from historic patterns, and this is having a negative impact on the wider economy. Preceding generations purchased houses and got married earlier. According to Pew data, as of 2012, 36 percent of young adults ages 18 to 31 were living with their parents. In 2007, 30 percent of this age group were married, but in 2012, only 25 percent were married. Using BLS data, young people ages 16 to 24 had an unemployment rate of 15.5 percent in 2013 and 14.2 in early 2014, leaving many of them unable to rent apartments and purchase or furnish homes. In contrast, the unemployment rate for people ages 25 and over was 5.4 percent in early 2014.

While facing difficulties in the labor market, many millennials are also dealing with the burden of high student debt. More young adults are taking on loans to pay for their education than did previous generations. According to New York Federal Reserve Board data quoted by the author, since 2005 the educational debt of Americans under age 30 has increased from about $13,000 to $21,000. While every other type of debt decreased among the general population since the recession began, student debt has increased; by 2012, it totaled more than $1 trillion. Yet despite the cost of acquiring an education, young adults are generally glad they did: around 90 percent of those who took out an education loan say their indebtedness has been worth it, according to Pew.

Overall, studies reported detrimental impacts of the Recession on health, particularly mental health. Macro- and individual-level employment- and housing-related sequelae of the Recession were associated with declining fertility and self-rated health, and increasing morbidity, psychological distress, and suicide, although traffic fatalities and population-level alcohol consumption declined. Health impacts were stronger among men and racial/ethnic minorities.

The Great Recession in the context of previous recessions

Table compares the recent (December 2007–June 2009) economic recession to the economic recessions of July 1990–March 1991 and July 1981–November 1982. The recent recession, officially lasting 18 months, was more than double the length of the 1990–1991 recession (8 months).