Congressional Control and Recessions: How Election Outcomes May Influence the Economy
As we approach another election, many of my conversations with clients revolve around how election outcomes might affect the economy. In July 2022, I began cautioning that conditions similar to those preceding past recessions were forming. I can't predict the future, but I analyze data for recurring patterns that have historically led to economic events. Markets constantly fluctuate, but recessions often result in sharp declines, making it crucial to identify the warning signs.
Here's the key point on elections: Congress has more influence on the economy than the President. Since WWII, there have been 12 NBER (National Bureau of Economic Research) dated recessions. Below is a list of those recessions, their causes, and the political party controlling each house of Congress when they began.
Most U.S. recessions since WWII follow a common pattern:
1. Inflationary Pressures Build Up: Driven by factors such as strong economic growth, government deficit spending, or external shocks.
2. Federal Reserve Intervenes: To fulfill its price stability mandate, the Fed raises interest rates to cool the economy.
3. Economic Activity Slows: Higher interest rates reduce consumer spending and business investment.
4. Recession Ensues: The economy contracts, leading to increased unemployment and reduced output.
Causes of inflation that have led to Fed actions:
- Economic Overheating: Periods of strong growth with high consumer demand outpacing supply.
- Government Spending: Spending on wars and social programs increases aggregate demand beyond the economy's capacity.
- Asset Bubbles: Overvaluation in housing and stock markets fueling perceived wealth.
- Supply Shocks: Oil crises causing cost-push inflation.
- Single-Party Congressional Control: When one party controls both houses of Congress, spending bills face less opposition, potentially leading to increased government spending.
The COVID-19 recession stands out as an exception, caused by a global health crisis rather than inflation and monetary policy. However, the resulting deficit spending was similar to what occurs under a single-party Congress.
1. Recession of 1948–1949
From November 1948 to October 1949, the United States faced a recession due to post-World War II economic adjustments. The end of wartime rationing unleashed pent-up consumer demand that outpaced supply. Industries struggled to shift from military to civilian production, causing supply constraints and rising prices—a classic demand-pull inflation. To combat this, the Federal Reserve tightened monetary policy by increasing the discount rate and reserve requirements, making borrowing more expensive. This led to reduced consumer spending and business investment, resulting in economic contraction.
House Control: Democratic
Senate Control: Democratic
2. Recession of 1953–1954
Between July 1953 and May 1954, the U.S. economy entered a recession precipitated by inflation from Korean War expenditures. Government spending on the war boosted aggregate demand, while consumers continued robust post-WWII spending. These factors led to rising prices as demand exceeded supply. The Federal Reserve raised interest rates to cool the economy and curb inflation. Higher borrowing costs dampened activity, leading to the recession.
House Control: Republican
Senate Control: Republican
3. Recession of 1957–1958
From August 1957 to April 1958, the United States experienced a recession triggered by inflation during strong economic growth. Booming industrial production and low unemployment increased consumer purchasing power, putting upward pressure on prices. Concerned about inflation, the Federal Reserve tightened monetary policy by raising interest rates and restricting credit. Increased borrowing costs led businesses to scale back investments and consumers to reduce spending, causing an economic downturn.
House Control: Democratic
Senate Control: Democratic
4. Recession of 1960–1961
The recession from April 1960 to February 1961 occurred after sustained economic expansion, which led to low unemployment and rising wages. Businesses, expecting continued high demand, accumulated large inventories. When demand slowed, these excess inventories became burdensome. To prevent overheating and address emerging inflation from wage pressures, the Federal Reserve raised interest rates. Higher borrowing costs discouraged investment and prompted consumers to cut back on spending, contributing to the slowdown. Leading up to the 1960 presidential election, political uncertainty may have influenced consumer and business confidence. Concerns about future economic policies possibly led to more conservative financial decisions by both individuals and corporations.
House Control: Democratic
Senate Control: Democratic
5. Recession of 1969–1970
Between December 1969 and November 1970, the U.S. economy underwent a recession caused by inflation from extensive government spending on the Vietnam War and Great Society programs without corresponding tax increases. This led to budget deficits and excessive demand, pushing prices upward. The Federal Reserve tightened monetary policy by raising the federal funds rate. Increased interest rates reduced consumer spending on durable goods and curtailed business investments, leading to contraction.
House Control: Democratic
Senate Control: Democratic
6. Recession of 1973–1975
From November 1973 to March 1975, the U.S. faced a severe recession initiated by inflation due to the 1973 OPEC oil embargo. The quadrupling of oil prices led to cost-push inflation, increasing expenses across sectors. Workers demanded higher wages to keep up with prices, fueling a wage-price spiral. The Federal Reserve raised interest rates to tackle inflation despite the slowing economy. The combination of soaring prices and high borrowing costs led to stagflation—stagnant growth with high inflation and unemployment—resulting in layoffs and decreased consumer confidence.
House Control: Democratic
Senate Control: Democratic
7. Recession of 1980
From January to July 1980, the U.S. faced a brief but sharp recession caused by persistent high inflation exceeding 10%, largely driven by the second oil crisis after the 1979 Iranian Revolution. Surging energy prices increased costs economy-wide. To combat entrenched inflation, the Federal Reserve, under Chairman Paul Volcker, aggressively raised the federal funds rate to near 20%. The steep rate increase led to significant reductions in spending and investment, causing contraction.
House Control: Democratic
Senate Control: Democratic
8. Recession of 1981–1982
From July 1981 to November 1982, the U.S. experienced a severe recession as the Federal Reserve continued efforts to curb high inflation. Structural issues, like declines in manufacturing and increased global competition, worsened the strain. The Fed maintained tight monetary policy, keeping rates high to control inflation. This prolonged period led to significant reductions in spending and investment. Unemployment soared above 10%, marking one of the most challenging periods since the Great Depression.
House Control: Democratic
Senate Control: Republican
9. Recession of 1990–1991
The recession from July 1990 to March 1991 was triggered by factors leading to inflation, including rapid late-1980s growth resulting in asset bubbles, especially in commercial real estate. The Gulf War caused oil prices to spike, adding inflationary pressure. The savings and loan crisis tightened credit as institutions faced losses and became cautious in lending. In response to rising inflation, the Federal Reserve raised interest rates—higher borrowing costs and stricter lending reduced investment and spending, leading to a slowdown.
House Control: Democratic
Senate Control: Democratic
10. Recession of 2001
The recession from March to November 2001 was primarily due to the dot-com bubble bursting. Speculation in tech companies led to overvalued stocks and an investment overhang. The economy was weakening when the September 11 attacks further shocked the system. Before the recession, the Federal Reserve had raised rates between 1999 and 2000 to address inflation from rapid growth and low unemployment. As conditions deteriorated, the Fed aggressively cut rates to stimulate the economy. Despite efforts, reduced investment and declining consumer confidence led to a slowdown.
House Control: Republican
Senate Control: Republican
11. Great Recession of 2007–2009
From December 2007 to June 2009, the U.S. experienced the Great Recession, the most severe downturn since the Great Depression. Inflationary pressures arose from a housing bubble fueled by low rates and lax lending, leading to inflated home prices and excessive borrowing. Rising global demand drove up oil and raw material prices. To cool the housing market and address inflation, the Federal Reserve raised rates from 1% in 2004 to 5.25% in 2006. Higher rates led to mortgage defaults, particularly among subprime borrowers, causing major financial collapses and a credit crisis. The downturn saw sharp unemployment increases and significant GDP declines with lasting global impacts.
House Control: Democratic
Senate Control: Democratic
12. COVID-19 Recession of 2020
The recession from February to April 2020 was unique, caused by the global COVID-19 pandemic rather than inflation or monetary tightening. The outbreak led to unprecedented lockdowns and travel restrictions, halting economic activity. The Federal Reserve responded with aggressive easing by slashing rates to near zero and initiating large-scale asset purchases. Despite swift actions, the sudden stop led to sharp contraction, rapid job losses, and significant GDP declines.
House Control: Democratic
Senate Control: Republican
Conclusion
These summaries illustrate a recurring theme in U.S. economic history since WWII: most recessions were preceded by inflation driven by factors such as excessive demand, government spending, asset bubbles, or external shocks like oil price spikes. In response, the Federal Reserve typically tightened monetary policy by raising interest rates to stabilize prices. While aimed at controlling inflation, these measures often reduced spending and investment, leading to contractions and recessions. The exception was the COVID-19 recession, caused by an external health crisis rather than economic factors related to inflation and monetary policy.
The government's economic response to the pandemic initiated a cycle that would typically end in a recession. Congress injected the economy with unprecedented deficit spending, leading to inflation levels not seen in 40 years. The Federal Reserve was slow to react, initially labeling inflation as "transitory" before rapidly raising interest rates to cool the economy and reduce inflation.
This cycle diverges from historical patterns. Despite strong economic growth, the government has continued deficit spending at levels usually seen only during wartime and recessions, while elevated interest rates have helped bring down inflation. Looking ahead, monetary policy often affects the economy with long and variable lags. The economy is showing signs of slowing, and unemployment has risen. If these trends persist, a recession may follow. Additionally, inflation could begin to rise again if the Fed cuts interest rates while deficit spending continues.
Looking at the data through a political lens, 83.33% of recessions began when one political party controlled both houses of Congress. In contrast, a divided government offers more checks and balances, making rapid policy shifts less likely to occur and impact the economy. Consequently, markets and the economy tend to be more stable with slower changes.