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November Economic Observer

Economic Roundup by Elliot Eisenberg, PhD. November 2019

RECESSION REASONS

Recessions tend to occur from sharp falls in auto sales, home construction, commercial construction, and corporate investment in plant and equipment. It's because purchases of these items can generally be timed, unlike services such as healthcare. Importantly, unlike housing, which skyrocketed early in the last decade to crash in 2007, precipitating a recession, these four sectors have been weak for some time now. This suggests a mild recession when it comes.

TARIFF TRAVAILS

Prior to slapping tariffs on China, US tariff revenues were $3 billion/month. They're now $7 billion/month; an increase of around $50 billion/year or 0.25% of GDP. Thus, GDP has been reduced by at least this much, and realistically much more because some purchases are simply not made and we're importing from other nations at prices higher than before the imposition of tariffs. Rearranging supply chains is very expensive.

MORE MONEY

When raising the minimum wage two things are relevant. First, what percentage of impacted firms are exporters? They are much less able to raise prices to offset the increase as they compete in world markets. Second, what percentage of the median wage is the new minimum? The higher it is, the more the unemployment rate rises. At $15/hour, the minimum wage would be almost 70% of the median; troublingly high.

AUTOMOTIVE ACTIVITY

In 2018, automakers sold 81.8 million vehicles and 4.2 million light commercial vehicles, down 400,000 from 2017, the best year ever. 2019 looks to be slightly weaker than 2018. The biggest market is China, with sales of 28.1 million vehicles. The US is a distant second at 17.3, followed by Japan at 5.2, India at 3.9, and Germany at 3.7. Collectively these five nations account for 67.7% of all sales.

EUROPEAN ECONOMIES

One reason Europe grows slower than the US is because it's a goods producing powerhouse. That's because EU rules allow goods to cross borders more easily than services. Unfortunately for Europe, service companies (like Google and Microsoft) are not only hugely valuable but are also more productive and pay better. Worse, the splintered eurozone has three times as many service firms as the US, thus few enjoy economies of scale.

SOPHISTICATED SCAMMERS

On social media, 91% of survey respondents said they initially failed to recognize fraudulent advertisements as scams and proceeded to engage and 53% eventually lost money. On websites, things were slightly better; the percentages were 81% and 50% respectively. However, via voicemail, only 42% engaged and just 13% lost money, and for phone calls the results were still better at 39% and 11%. I'm reconnecting my land line!

Elliot Eisenberg, PhD, Chief Economist for GraphsandLaughs, LLC, an economic consulting firm serving a variety of clients across the United States. All rights reserved.

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