Barely a year after the 1980 recovery began, the economy fell back in — the second leg of the famous double dip, and the most painful disinflation in modern Fed history. Volcker kept the funds rate near 19% and the prime rate above 21% through 1981; nothing in the credit economy could function at those prices for long.
The price of credibility
Manufacturing and construction hollowed out — the Rust Belt label dates from this period — and unemployment rose to 10.8% in late 1982, a post-war record that stood for nearly four decades, until COVID's one-month 14.7% spike. The recession ran 16 months, matching 1973–75 as the longest post-war contraction at the time. In return, inflation collapsed from double digits to under 4% within a year of the trough.
The signal record
Nearly every leading indicator warned in sequence: the curve had inverted through 1980–81, permits and starts fell from early 1981, credit spreads widened, and claims built through the year. It is the textbook case of signals stacking — by mid-1981 almost the entire panel was active, which is what a severe-band reading looks like in practice.