Unemployment claims dropped by 8,000 last week showcasing a very strong job market for all sectors of employment. The U.S. Dept of Labor Report shows continued strong jobs growth surprising most economic pundits.

(DOL Report – pdf page 4)

(Reuters) – The number of Americans filing applications for unemployment benefits fell more than expected last week, consistent with strong labor market conditions and continued job growth.

Initial claims for state unemployment benefits decreased 8,000 to a seasonally adjusted 211,000 for the week ended Nov. 2, the Labor Department said on Thursday. Data for the prior week was revised to show 1,000 more applications received than previously reported. Economists polled by Reuters had forecast claims would fall to 215,000 in the latest week. (read more)

Additionally, in a related Bureau of Labor Statistics (BLS) report unit labor costs increased to 3.6% with a 3.3% increase attributed to increased wage costs. This is a key metric.

The U.S. economy has started the process of re-coupling economic activity to the labor market. This is going to be a key to watch moving forward. Watch closely…. Within this process the wage and benefit aspect to the production cost will now start to influence the output costs of the finished product, natural inflation.

Aggregate U.S. inflation has been heavily influenced by import prices dropping, a result of EU and Asian internal activity to offset tariffs, and the strength of the U.S. dollar. In essence we have been importing deflation. This process has been ongoing for more than two years. [CTH predicted this outcome back in 2015.]

However, U.S. imports are now slowing…. and U.S. consumers are purchasing more products, finished goods, from within the U.S internal economic system [(manufacturing and production (which includes restaurants)]. As the percentage of total economic growth upticks from internal U.S. activity, and a higher percentage of overall GDP is internal to the U.S. economy, natural wage growth will begin generate inflation.

Do not be surprised to see this current quarter (Q4) when measured in late January 2020, showing the first significant increases in inflation. Bookmark my prediction of 0.5% added to inflation in this current quarter we are in (Oct-Dec 2019).

Right now year-over-year wages are growing between 3.0 and 3.6%. Output costs are now (re-coupling phase) starting to increase slightly more than wage growth, 3.3% just reported. Natural inflation will now start to kick-in, domestic prices reconnected to wages.

Inflation has been running around 1.5% with slight ups and down relating to external dynamics (EU/China devaluation, subsidies etc.). The international community has fired their main cannons, they have nothing left to defend against tariffs and policies that bring the production economy back to the U.S.

We should now start to see inflation growth due to internal dynamics. Watch now as the Main Street engine is re-coupled and we’ll start to see inflation at two percent and more.

This is the beginning, the very beginning, of a return to natural economic cycles.

There are going to be many connected smaller economic elements yet to be settled. However, in the big picture the apex has been reached. We are in the period of pause, where U.S. multinationals have to make a decision. Either they remain overseas and face higher overall costs to bring their products to the U.S. market; or they return to an economic system that has now been reset to be competitive and more predictable.

We will watch it unfold together.