Causes
On Black Monday of October 1987 a stock collapse of unprecedented size caused the Dow Jones Industrial Average to fall by 22.6%. This collapse, larger than that of 1929, was handled well by the economy, and the stock market began to quickly recover. However, in North America, the lumbering savings and loans industry was beginning to collapse, leading to a savings and loan crisis which put the financial wellbeing of millions of Americans in jeopardy.
The panic that followed led to a sharp recession through financial contagion, that hit hardest those countries most closely linked to the United States, including Canada, Australia, and the United Kingdom. The economies of much of Europe and Japan were hurt, but not as badly. The US economy continued to grow as a whole, although certain sectors of the market such as energy and real estate slumped.
The first burst of the recession was short-lived, as fervent pre-election activity by the governments of the United States and Canada created what many economists at the time saw as an economic miracle: a growing consumer confidence and increased consumer spending almost single-handedly lifted the North American economy out of recession.
By 1989 it soon turned out that the quick recovery was illusory, as inflation increased to 5.1% in 1989 and economic growth slowed. The Federal Reserve's decision to raise interest rates to combat inflation also slowed the economy down. By 1990, economic malaise had returned with the beginning of the Gulf War and the resulting 1990 spike in the price of oil, which also increased inflation but to less of a degree as the oil crisis ten years earlier. Nevertheless, for the next several years high unemployment, massive government budgetary deficits, and slow Gross Domestic Product (GDP) growth affected the United States until late 1992 and Canada until 1995.
The rest of the world was less affected by the downturn; Germany and Japan both grew rapidly. Some pundits guessed that this would be a permanent state of affairs and that both the German and Japanese economies would grow to be larger than the American one.
Like all recessions, the one of the late 1980s and early 1990s had a profound impact on society. Rates of alcoholism and drug abuse increased, as did rates of depression.
Read more about this topic: Early 1990s Recession