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Recession of 1974

Towards the end of 1973 came a steep rise in crude oil prices, mandated by the Organization of Petroleum Exporting Countries (OPEC). The tax-paid f.o.b. cost of a barrel of "Saudi Arabian Light" rose from $1.62 in January 1973, to $3.15 in October 1973, to $7.11 in January 1974, better than a quadrupling of the price in a year. No price control system could be effective against that sort of shock. 1974 would be a year of some of the worst annual rates of inflation in the country's history was assured. For the year the CPI rose 11 percent and the PPI rose 18.9 percent.

Only in the fourth quarter of 1974, when real GNP declined at an annual rate of 5.8 percent and the unemployment rate rose precipitously, did the actual budget deficit begin increasing. Actual revenues for the year were reduced $10.8 billion below their full-employment level. Although real GNP declined throughout 1974, the severity of the downturn did not become apparent until the end of the year.

In the next 3 years, inflation moderated substantially from its 1974 rates. Prices of food, energy, and basic materials rose much less rapidly in these years than in 1974. Together with the severity of the 1974-75 recession, the slowing of price rises in these areas led to a reduction of rates of increase in other prices and in wages. The rate of increase in compensation per hour fell from 11 percent in 1974 to around 8 percent in the next 3 years. The annual rate of increase of prices of all items in the CPI, other than food and energy, was a uniform 6 to 6-1/2 percent during the period.

Real GNP growth was negative in all four quarters of 1974. Nevertheless, the unemployment rate continued to be sticky through the first half of 1974, rising only from 5 percent in January to 5.5 percent in August. And since inflation rates continued to worsen, President Ford unveiled his WIN (Whip Inflation Now) campaign in October of 1974. The notion that wages, prices, and inflation can be controlled through a presidential appeal for cooperation between businessmen and unions was, at best, naive.

Shortly thereafter, the unemployment rate became unstuck, rising to 6.1 percent in October, 7.2 percent in December, 8 percent in February 1975, and 8.9 percent in May. It declined slightly during the remainder of the year, falling to 8.3 percent in December 1975--averaging 8.5 percent for the year. The drop in real GNP ended between the first and second quarters of 1975. Although for the year as a whole the average rate of growth of output was negative, quarterly rates were positive in the second through fourth quarters of the year.

The downturn had been, by far, the most severe since the Great Depression of the 1930s and the annual rate of growth of real GNP of 5.7 percent in 1976 did not represent a particularly strong recovery. terly increases, expressed as annual growth rates, declined from 9.0 percent in the first quarter to a weak 2.4 percent in the fourth. This decline explains the behavior of the unemployment rate in 1976. IT fell from from 7.9 percent in January to 7.5 percent in June, but stayed at 7.7 percent throughout the second half of the year - a most disappointing performance in the first full year of an economic recovery.

The growth of output was lower in 1977 and the unemployment rate gradually fell. For the year, real GNP grew at a rate of 4.9 percent. However, differences in quarterly changes (expressed as an annual growth rate) were not as sharp as in 1976, though such changes again declined throughout the year, from 7.1 percent in the first quarter to 3.2 percent in the fourth. The unemployment rate fell steadily from 7.8 percent in December 1976 to 7.1 percent in April 1977. It remained stuck around 7 percent through November, but declined to 6.4 percent in December. During 1978, it fluctuated narrowly around 6.2 percent.

If used instead of the unemployment rate, total employment data give a somewhat more salutory view of the operation of the labor market in the post-1975 economic recovery. The cyclical decline in total employment ended in April 1975. In the subsequent 3 years and 3 months, more than 10 million new jobs were created, an increase from June 1975 to June 1978 of 12 percent in total employment. By contrast, in the 3 over-full employment years of 1967-69, average total employment grew from 72.9 million in 1966 to 77.9 million in 1969, an increase of 6.9 percent. Thus, from the perspective of total employment data, the performance of the economy from mid-1975 to mid-1978 seems historically unexcelled - yet the unemployment rate remained high by historical standards.

At least three factors contribute to this paradox. Two are the growth of, and changes in the composition of, the labor force. The third is the high rate of unemployment of blacks in general, and black teens in particular.

The civilian labor force grew almost as fast as total employment from 1975 through 1978 so the difference between the two, total unemployment, hardly fell. The 25-year trend of a declining labor force participation rate of adult males seemed to end, at least temporarily. The 25-year trend of a rising labor force participation rate of adult females seemed to accelerate slightlyo The labor force participation rate of teens rose above 55 percent for the first time. Thus, on balance, the trend toward a larger proportion of women and teens in the total force seemed to accelerate. But teenagers and adult females tend to be less permanently attached to the labor force than do adult males; hence, these groups have higher unemployment rates. A period of unemployment often accompanies new entry or reentry into the labor force. Thus, when a larger proportion of the total labor force is composed of groups who have higher unemployment rates, the overall unemployment rate tends to be sticky.

Unemployment rates among blacks (especially teenagers), however, are a major structural problem that differing turnover rates of adult and teenage workers cannot explain. While the unemployment rate for whites rose dramatically in the 1974-75 recession, from 4.5 percent in January 1974 (12.9 percent for teenagers) to 8.4 percent in May 1975 (18.4 percent for teens), it declined steadily during the subsequent recovery falling to 5.5 percent (12.7 percent for teens) in December 1977.

In contrast, the unemployment rate for blacks rose from 9.3 percent in January 1974 (29.9 percent for black teens) to 15.4 percent in September 1975 (40.1 percent for black teens). By December 1977, the unemployment rate for all blacks had fallen only to 13.7 percent and the rate for black teens stood at 40.3 percent. Since black workers constitute about 10 percent of the labor force, the failure of their unemployment rates to fall in the recovery helps to explain, in part, why the overall unemployment rate was so sticky.

In a market economy, changes in relative prices are a signaling and market coordinating mechanism, and that mechanism is interfered with by wage and price controls. The interference is least severe when economic activity is sluggish, as in 1971, and most severe when economic activity is buoyant, as in the fourth quarter of 1972 and first quarter of 1973 when real GNP rose at an annual rate of better than 8 percent. Since the rate of inflation had dropped and since the economy was clearly in a period when wage and price controls potentially do their worst harm, Phase II of the controls program ended. It was replaced by Phase III, which generally reduced controls and relied on self-enforcement.

The growth rate of real GNP,in the third and fourth quarters of 1976 was below 3 percent. Furthermore, in those 6 months the unemployment rate hovered just under 8 percent, after having fallen to around 7.5 percent in the second quarter. So, when the Carter Administration took office in 1977, it was convinced that new stimulatory measures were needed.

As the nineteen seventies went on, many Americans became tired of economic struggle. They also became tired of social struggle. They had been working together for common interests. Now, many wanted to spend more time on their own interests.