What Happened After The Last Time The Labor Market Was This Tight?

An extremely tight labor market, coupled with historically low unemployment and high demand for workers put upward pressure on wages and prices, with inflation reaching 6.2%.

Despite those conditions, a recession was on the horizon as the Federal Reserve tightened monetary policy to curb inflation and slow down the economy. This combination resulted in a slowdown of economic activity and an increase in unemployment, signaling the start of a recession.

“Tax rates were raised, growth in Government spending was reduced, and monetary growth was restrained,” wrote Norman Bowsher, then-Senior Economist at the Federal Reserve Bank in St. Louis.

The description and quote were taken from a December 1969 research note on the battle against inflation.

Do those situations sound familiar?

The End of the '60s: In 1969, employment rose substantially as the U.S. added roughly 2 million jobs. The most vigorous job growth — as well as the lowest rate of unemployment — was recorded in the early months of the year.

In the ensuing months, the demand for labor slackened significantly under the impact of the Fed’s anti-inflationary measures, and the jobless rate moved to somewhat higher levels.

The recession that followed the historically low unemployment in 1969 lasted just 11 months, beginning in December 1969 and ending in November 1970.

The recession coincided with an attempt to start closing the budget deficits of the Vietnam War (fiscal tightening) and the Fed raising interest rates (monetary tightening). During that recession, the GDP of the U.S. fell roughly 0.6%.

While that recession ended in November 1970, the unemployment rate didn’t peak until the next month. In December 1970, the unemployment rate reached the height of the cycle, coming in at 6.1%.

That brings us to the January 2023 economy, where the economy added 517,000 jobs, bringing unemployment down to lows last seen in December 1969.

The increasing similarities between the 1969 economy and the 2023 economy are prompting some analysts to believe that a Disco-era type contraction is ahead.

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How did the stock market perform back then? As an investor would expect, the S&P 500 fell around 34% from the highs seen in that period. The index fell another 14% after the recession was officially announced.

Right now, the S&P 500 is down around 13.4% from the highs seen in 2021.

The bear market of 1969 was relatively short-lived and the bull market that followed gave investors returns of 73.5% between mid-1970 and the beginning of 1973.

So, even if we do get a recession — using history as a compass, it won’t be so bad, right? Well, yes and no. If we use history as the only compass — sure, this recession will be relatively mild, but what happened after the 1973 bull market ended was far worse.

Welcome To Stagflation: Stagflation was a term coined in the 1970s to describe the unique economic condition of the time, where the economy was experiencing both high inflation and stagnant economic growth.

This combination of factors was considered unusual because typically when inflation rises, economic growth slows down, and when economic growth is strong, inflation tends to be low.

The root cause of stagflation from 1973 to 1982 was a perfect storm of several economic factors.

First, the world was facing an oil crisis (flashbacks to 2022?), as the major oil-producing countries in the Middle East formed the Organization of the Petroleum Exporting Countries (OPEC) and embargoed exports to countries that supported Israel in the Yom Kippur War.

This resulted in a significant increase in the price of oil, which had a ripple effect on the entire global economy.

Additionally, the post-war economic boom was slowing down, leading to a decrease in consumer demand and business investment. This, in turn, led to a decrease in job creation and higher unemployment rates.

At the same time, the Fed was implementing tight monetary policies, which resulted in higher interest rates and reduced consumer spending.

Further, the U.S. was involved in a costly and prolonged conflict in Vietnam, which put a strain on the economy and resulted in government spending on military efforts and decreased spending on social programs and infrastructure.

The result of these various factors was stagflation, a period of high inflation, slow economic growth and high unemployment.

The combination of these conditions made it difficult for policymakers to address the economic challenges, as any efforts to curb inflation would result in slower growth, and vice versa.

Ultimately, it took a combination of monetary and fiscal policies, along with changes in the energy market and a reduction in government spending, to bring the economy out of stagflation in the 1980s.

While the U.S. economy isn’t seeing signs of stagflation yet — again, using history as a compass — we are somewhere around the economic expansion between 1969 and 1973.

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