The 1957-58 Recession: Sputnik-Era Sharp Contraction

The 1957-58 US recession, sometimes called the Eisenhower recession, was the third postwar US cycle. It ran 8 months from August 1957 to April 1958 according to NBER's subsequent dating, contracted real GDP by 3.7 percent peak to trough (the deepest postwar contraction up to that point), and pushed unemployment to a peak of 7.5 percent in July 1958. Industrial production fell 13 percent peak to trough, the sharpest non-Depression industrial contraction in US history at that point.

The recession was caused by three reinforcing factors that concentrated in a short period. The Federal Reserve had tightened monetary policy through 1956 and 1957 to slow accelerating inflation. The postwar pent-up demand for autos and other durable goods that had powered the 1946-56 expansion had been largely exhausted by 1957, with the autos sector entering a cyclical downturn that pulled broader durable-goods manufacturing with it. And the 1957-58 Asian flu pandemic reduced labour-force participation and consumer spending through the autumn of 1957. None of the three factors alone would have produced a deep recession, but the combination produced a sharp contraction. Recovery was correspondingly rapid: real GDP grew 7.7 percent in 1959, the strongest single year of postwar growth between 1951 and 1965.

Origins: The Postwar Expansion Matures

The decade from 1946 to 1956 had been an extraordinary period of US economic growth. The wartime production halt in passenger autos (which ran 1942-45 with civilian auto production essentially zero), housing (suspended during the war), and consumer durables had built up enormous pent-up demand by 1945. The Federal Reserve's wartime-era ultra-loose monetary policy (the Treasury-Fed Accord did not come until 1951) had financed substantial household savings. The combination of pent-up demand and savings produced the 1946-56 expansion that lifted US median real income substantially.

By 1957, the pent-up demand cycle was nearing exhaustion. New auto registrations peaked in 1955 at 7.2 million and began declining. Housing starts peaked in 1955 and entered a multi-year decline. Refrigerator, washing machine, and television sales (the postwar appliance revolution that had electrified American suburbs) all reached saturation among middle-class households by the mid-1950s. The natural cyclical downturn that the durable-goods exhaustion implied was the underlying business-cycle dynamic. The Fed tightening accelerated the timing.

Federal Reserve Tightening 1956-57

Consumer price inflation had accelerated through 1956 and 1957, reaching 3.7 percent year-over-year by mid-1957 (a high rate by the standards of the 1950s, when 1 to 2 percent inflation was typical). The Federal Reserve under Chairman William McChesney Martin Jr was committed to maintaining price stability, having operated since the 1951 Treasury-Fed Accord with greater independence than during the war years. Martin raised the Fed discount rate from 2.0 percent in mid-1955 to 3.5 percent by August 1957, a substantial tightening for the era. The 3-month Treasury bill rate rose from below 1.5 percent in 1955 to over 3.5 percent in late 1957.

The tightening operated through the housing and capital-expenditure channels. Mortgage availability tightened. Commercial bank lending slowed. Corporate bond issuance pulled back. The cyclical downturn in durable goods was reinforced by the credit-side pressure. By summer 1957, the conditions that NBER would subsequently identify as the recession peak were in place.

The Asian Flu Pandemic

The 1957-58 influenza A H2N2 pandemic originated in Asia in early 1957 and reached the United States in autumn. It was the second-largest US influenza event of the 20th century after the 1918 Spanish flu. Subsequent epidemiological estimates put US mortality at 70,000 to 116,000, with substantially more illness causing missed work and reduced consumer activity. The pandemic peaked in October and November 1957, exactly when the recession was sharpest. Schools closed in some communities. Retail and restaurant activity contracted as households stayed home. Manufacturing absenteeism rates spiked.

Recent economic-history research has attempted to disentangle the pandemic effect from the broader recession. Estimates suggest the flu contributed roughly 0.5 to 1.0 percentage points of the GDP contraction, with the balance attributable to the Fed tightening and autos cycle. The 1957-58 experience is the closest historical comparison for the 2020 COVID recession in the sense that both involve significant US influenza-family pandemics during a recession period. However, COVID was both a much larger pandemic (more than 10 times the US mortality) and met an economy in much better cyclical position, so the comparisons are limited.

The Sharp V-Shape Contraction

The 1957-58 recession was unusually sharp for its short duration. Real GDP fell 3.7 percent in 8 months, an annualised contraction rate roughly comparable to the 1973-75 cycle that lasted twice as long. Industrial production fell 13 percent peak to trough. Manufacturing employment fell roughly 10 percent. Unemployment rose from 4.1 percent at the recession start to a peak of 7.5 percent in July 1958, three months after the official trough.

The depth and speed reflected the simultaneous combination of the three contributing factors. Each individually would have produced a milder cycle. Together they concentrated the damage in a short period. The recession was sometimes described in contemporary accounts as a Rolling Recession with sequential sectoral contractions: autos in late 1957, capital goods in early 1958, retail and services in spring 1958. By April 1958, all three had reached their cyclical troughs.

The Policy Response and the Recovery

The Federal Reserve eased rapidly once the recession became clear. The discount rate fell from 3.5 percent at the recession start to 1.75 percent by April 1958, the most aggressive postwar easing cycle until that point. The Eisenhower administration accelerated public works spending through state and federal infrastructure programmes. Tax reduction was discussed but ultimately not implemented at the federal level (state-level tax measures provided some support).

Recovery was strong and V-shaped. Real GDP grew 7.7 percent in 1959, the strongest single year of postwar US growth between 1951 and 1965. Unemployment fell from its 7.5 percent July 1958 peak to 5.5 percent by mid-1959. Industrial production recovered all of its recession losses within twelve months. The strength of the recovery reflected the modest financial-system damage (no banking-system stress; minimal capital impairment), the pent-up demand that the recession had built up in delayed autos and housing purchases, and the aggressive monetary easing.

The strength of the 1959 recovery contributed to Fed concern about renewed inflation pressure, leading to the tightening cycle that produced the 1960-61 recession. The pattern of consecutive recessions (1957-58 and 1960-61) at a 2-year interval was unusual by postwar standards and reflected the heightened sensitivity of the late-1950s economy to small monetary-policy shifts.

Long-Term Lessons

The 1957-58 cycle established the postwar pattern of central-bank-driven recessions: a Federal Reserve tightening cycle, designed to fight inflation, produces a recession by tightening credit conditions in interest-rate-sensitive sectors. The pattern would be repeated in 1960-61, 1969-70, 1973-75 (with the supply-shock complication), 1980, 1981-82, 1990-91, and 2007-09. The 1957-58 cycle is the cleanest early example.

The cycle also demonstrated that postwar US business cycles, having been institutionally re-engineered after 1933 with deposit insurance, the Federal Reserve's lender-of-last-resort capacity, and automatic fiscal stabilisers, were now shorter and more recoverable than pre-WWII cycles. The 8-month duration and rapid V-shape recovery were a sharp contrast to the multi-year contractions that had characterised the pre-1933 era. The institutional infrastructure was working as designed.

The 1958 midterm election results have been viewed as a useful early case study in the political consequences of recession. Republican losses of 49 House seats and 13 Senate seats in November 1958 were attributed substantially to voter response to the still-elevated unemployment (which peaked at 7.5 percent in July 1958, just months before the election, and remained above 6 percent on election day). The pattern of incumbent-party losses during or shortly after recessions has continued through subsequent cycles, with the 1980 Carter loss to Reagan, the 1992 Bush loss to Clinton, and the 2008 Obama victory over McCain all occurring during or shortly after recession periods. The 1958 case is the cleanest early example because the recession was already officially over (NBER subsequently dated the trough to April 1958, seven months before the election) yet the labour-market lag still drove voter discontent.

The methodological refinements that the cycle prompted at NBER were significant. The committee's ability to identify the cycle peak (August 1957) and trough (April 1958) within a few months of each turning point validated the broader six-indicator framework that had been formalised in Wesley Mitchell and Arthur Burns' 1946 NBER methodology paper. The committee's subsequent dating of the cycle was uncontroversial; the methodology that it tested has remained essentially unchanged through the seven decades since.

For comparison with other postwar cycles, see the post-WWII recessions overview. For the next cycle, see the 1973-75 recession. For the closest pandemic-recession comparison, see the 2020 COVID recession.