Job Market Tightening
The labor market is really starting to tighten and Thursday's initial jobless claims coming in at 297,000 for the May 10 week is the lowest reading since May 2007. In several of the economic reports this week, increased strength in the labor components also suggest increased hiring in the manufacturing sector in the Empire State Manufacturing Survey coming in at a whopping 19.01.
This follows the strongest employment report since the financial crisis where the economy added 288,000 jobs bringing the unemployment rate down to 6.3%, with upward revisions for the previous two months as well. So the jobs market is trending higher, and this is the best run of job creation since the financial crisis.
The PPI and CPI reports this week also showed us that inflation is really starting to stoke in the economy for the first time since the financial crisis where it is actually showing up in the data the Fed tracks. The PPI up 0.6 percent in April, following a 0.5 percent boost in March with the CPI coming in at 0.3 percent rise for April while previously rising 0.2 percent in March. Expect the PPI to start bleeding into the CPI in the coming months, and are we finally coming to that moment where inflation that everybody recognizes starts showing up in 'undeniable bluntness' that finally captures the attention of Wall Street and the Federal Reserve by showing itself even in the artificially watered down metrics used to track inflation by the US Government?
Inflation Inflection Point
We all experience inflation in our everyday lives, and obviously it is being downplayed by Central Banks wanting to inflate the monetary base, and thus monetize the debt by making its significance less in relative terms. But are we finally coming to that point in Great Britain and the United States where inflation really starts to take off and get out of hand? I think once these minimum wage initiatives get implemented this is where wage inflation and price increases really start taking off, and we are in store for some shocking PPI and CPI reports over the next year.
I think this is the one area where markets and the Federal Reserve are really asleep at the wheel, under the radar we are starting to see some forces come together to finally make a reality - the inflation problem of being behind the curve in tightening mode that we all feared would show up one day. By the time the Fed realizes inflation is a problem it is too late, and because it has failed to rear its ugly head for five years on loose monetary policy, the complacency factor is huge right now in the financial community.
I have seen wages rise significantly in my high skilled colleagues who move from better paying opportunities to the next with fortune 500 corporations fighting over scarce talent, the only thing holding wages down have been the entry level and middle class job categories. Once the minimum wage is increased this puts upward pressure on wages in the next tier of salaries, as increased responsibilities necessitate higher wages than entry level, and so on up the wage scale. The analogy is the housing market where an increase in first time buyers into the market puts upward pressure on the housing market raising prices on the next tier as more home owners are able to move up to the next tier, thus reinforcing prices in an upward slope.
I think raising the minimum wage is good for the economy in the long run in this instance, but there is definitely going to be some growing pains in terms of higher inflation, and a tighter monetary policy going forward. I think the Fed can talk down the market all they want, but they are going to be raising rates a whole lot sooner than their current rhetoric would have Wall Street believe. Moreover, if they make the mistake of stalling rate increases to appease Wall Street they will fall significantly behind the inflation curve, and the pain in playing catchup in terms of monetary policy pain will be far worse for the street.
May Employment Report in 2 Weeks
Thus, watch the May employment report which comes out in two weeks. I predict another very strong employment report that shows the trend in job creation is much stronger than most on the street realize. I am looking for a breakout number above 300k based upon how the initial jobless claims data is trending of late, and some of the employment components in the economic reports. There is little doubt that the job market is tightening, and wage pressures are sure to follow, real in your face inflation is just around the corner, and the Federal Reserve will be tightening monetary policy much sooner than most people realize in the financial community.