VERSACE: Many brace for coming economic data

ANALYSIS/OPINION:

This past week brought a rash of economic data that showed domestic manufacturing continues to improve even though Europe and Asia are weak and slowing, respectively.

Oil and gas prices continue to be at the forefront of the conversation this week even as fresh data showed that year-over-year growth in personal income and spending continued to slow in January, while the savings rate dipped in January compared with December.

I suspect that this week’s rear-window-facing economic data will placate some, but many are already bracing for what the next few months will bring. The net effect has the S&P 500 modestly changed compared with its close last Friday and the Dow Jones industrial average hovering around the 13,000 mark. This week we exited February and, after two months of trading so far in 2012, those two market indexes are up 9 percent and 6 percent, respectively.

Expanding on the above, data this week confirms that the 17-member eurozone is stuck in at least a mild recession, as new orders continued to fall. Markit’s Eurozone Manufacturing Purchasing Managers’ Index (PMI) rose to 49 last month from January’s 48.8, but has now been below the 50 mark that defines growth or contraction since July. That was for manufacturing, but the data for the services side of the European economy were not much better. Markit’s eurozone Services PMI contracted to 49.4 in February from a reading of 50.4 in January.

As if that were not bad enough, Eurostat reported record high unemployment in the eurozone of 10.7 percent in January, as well as an unexpected increase in eurozone inflation, with the consumer price index edging up to 2.7 percent in February as a result of high oil prices brought on by a cold winter. It would appear that despite some progress on Greece, Europe has yet to emerge from the proverbial woods.

In and of itself, that is not good news, but when we couple it with slower growth in China, India and some of the other emerging markets, it suggests that the global economy may not be as strong as recent data may have led some to believe.

We are nearing the end of corporate earnings reports, so the velocity of those reports will wane and the number of economic releases will also dip next week compared with this past week. That slowdown will put even more emphasis on two items next week — Europe and the domestic employment report for February, which is slated for delivery next Friday. Obviously we all will be watching the official unemployment rate as revealed by the Bureau of Labor Statistics, with a close eye not only on its composition but also on the participation rate, which has been falling over the past several months and been worrisome to many, myself included.

Recent findings from Gallup suggest the recent trend of a declining unemployment rate may change next week. According to Gallup data, U.S. unemployment rose in mid-February to 9 percent, up from 8.3 percent for mid-January. Underemployment in mid-February also rose, according to Gallup’s findings, rising 19 percent in mid-February from 18.1 percent in mid-January. Also this week, Federal Reserve Chairman Ben S. Bernanke warned of slow progress ahead on the jobs front and cautioned that improvement hinges on “stronger growth in final demand and production.”

My concern over rising gas prices at sustained levels from last week remains, and I continue to see higher oil and gas prices reducing disposable income and driving consumers to be more cautious once again about spending. Energy prices at not only higher levels but higher sustained levels are likely to pressure profits at companies, forcing a re-evaluation of spending and restraining hiring, particularly if demand winds up being less than expected in the coming months.

More comment next week as we get more from the ADP Employment Report and the Challenger report on job cuts in advance of the Bureau of Labor Statistics report on February job creation.

Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on Twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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