Today the monthly employment data was released by the BLS showing good jobs and wage growth. Traditionally this is viewed as inflationary and thus damaging to bonds.
However, at the top of an economic cycle is when inflation and employment data peak, followed by a crash caused by excessive Fed tightening and by a reduction in corporate earnings caused by higher wages and higher interest rates. This reminds me of 2008 when oil was ludicrously high at 144 (it went to 35 in 2009). The extreme rise in oil’s price helped to slow down the economy and tip it into recession.
Inflation is not caused simply by workers getting a job, rather the real cause is when the money supply is increased through bank lending. To qualify for a loan one needs a good, stable job, some reserves, a good credit rating, etc. The new entrants to the employment world may be low skilled, low income people who have a history of long term unemployment, bad credit, no reserves and are thus less likely to get an inflation causing loan than are the segment of workers who are more skilled and who have been continuously employed for a long time. Much of the employment gains in the past 6 months were for the least educated sector of workers; those who are well educated already achieved full employment a few years ago and yet inflation was often below 2% in recent years.
Employment compensation inflation of 3% hints that inflation is accelerating, however the wage increases that are above the 2% inflation rate are those paid to the elite, highly skilled workers. Perhaps 20% or 30% of the workforce may be getting inflationary pay raises but then the “problem” with the high income households, according to economists, is that they “save too much” and thus don’t stimulate the economy. Economists prefer that lower skilled, lower paid people would get bigger raises so they could consume more thus stimulating the economy. But this won’t happen. Instead potentially inflationary raises will be parked in the savings accounts or brokerage accounts of affluent workers and thus won’t contribute to inflationary consumption. Jim Bianco made a chart showing tech workers got 3.8% pay raises vs. manufacturing workers got 1.9%. Some of the compensation went to employer paid health care which can’t be spent or used to get a loan and thus is less likely to lead to a bank loan driven inflationary spiral.
A normal economic recovery with a low unemployment rate results in wage growth of 4 or 5%, not 3%. A normal recovery with a tax cut stimulus results in a 5% GDP, not the current GDP estimated to be 2.9% by Atlanta Fed nowcast. There is so much debt, double the normal percentage of GDP, that consumers can’t engage in inflationary consumption because they need to pay down debt.

    Tariff increases will act as a tax to dampen inflation. There two ways to suppress inflation: either raise taxes or raise interest rates. Since the government, including the Fed are doing both then this should suppress the potential inflation caused by modest wage growth. Trade wars act to disrupt commerce for both countries thus damaging employment and making companies hesitate to expand until things settle down. Wars often start with the assumption they will only last a few months but then they drag on for several years and expand far beyond original expectations. I expect China will dig in deeply to defend its interests and thus the trade war will last a long time and result in disruptions to the economies of the two countries. This will dampen employment growth in both countries.
I expect eventually stock market will crash to half of its current price which would induce a negative “wealth effect” resulting in less consumption and lower inflation. A real estate crash would make people who fill out questionnaires about Owners Equivalent Rent start to use more reasonable estimates of rental inflation, thus lowering the CPI. During boom times these people overestimate rents.

   Investors need independent financial advice about how rising employment affect bonds.