- - Thursday, March 8, 2012

ANALYSIS/OPINION:

I still have the concerns I voiced last week about rising oil and gas prices and the effect they have on disposable income and consumers cautious about spending. Higher energy prices, especially at sustained levels, also are likely to pressure profits at companies, force a re-evaluation of spending and restrain hiring, particularly if demand winds up being less than expected in the coming months. According to AAAs Daily Fuel Gauge Report, gas at the pump continued to creep higher in the past week and now stands at $3.76 per gallon, up almost 30 cents in the past month.

The larger concern is that these higher fuel costs not only will drive up costs on food and other goods and services, but it will further crimp the domestic recovery. Thats right, I said “further crimp,” because when we drill down on some of the more recent job creation data we find it is vectoring in the wrong direction.

Earlier this week, we received ADPs take on private-sector job creation in February and the headline showed a net increase in new jobs month over month. Some quick analysis of ADPs findings, however, reveals the number of jobs created in the first two months of 2012 fell compared to 2011. For the first two months of 2011, ADP showed 406,000 nonfarm jobs were created compared to 389,000 for the first two months of this year - a contraction of more than 4 percent. Turning to Februarys Challenger Job Cuts Report, we find the pace of planned layoffs year to date is up 18 percent from last year, with 105,214 job cuts announced through the first two months, compared to 89,221 during the same period in 2011.

Even economists and pundits are expecting Fridays February Employment Report from the Bureau of Labor Statistics to show job growth slowed last month. The current consensus according to Briefing.com calls for the domestic economy to have added 206,000 nonfarm payroll jobs, compared to 243,000 in January. Should that forecast prove accurate, its another number pointing in the wrong direction.

The unemployment rate has fallen from 9.0 percent in September to 8.3 percent in January, but that’s largely because of people continuing to leave the work force. As a result, Ill be watching Februarys participation rate closely to see if that trend has continued, slowed or reversed. Also too, figures on average hourly earnings, the average workweek and overtime (especially the latter two) will bear watching, as any move higher would suggest the need to hire. In the past five months, both the average workweek and overtime have remain unchanged.

Next week, well get an update on inflation expectations as the Bureau of Labor Statistics releases the Producer Price Index(PPI) and Consumer Price Index (CPI)data for February. Given the move described above in gas prices, one would expect the CPI to heat up compared to January. While I suspect we will see just that, the Federal Reserve tends to focus on the core CPI as an inflation barometer, even though it excludes food and energy, which account for more than 17 percent of a persons average annual expenditures on a combined basis, according to U.S. Department of Labor data.

The relationship between the indexes in February also bears watching to see whether manufacturers and service providers are attempting to pass rising input costs on to consumers. If the CPI rises faster than PPI for the month, look for the warning bells to ring on disposable income and discretionary consumer spending.

Taking all of this leaves me less bullish than I was at the start of 2012. Proactive investors can build that shopping list to take advantage of near-term volatility to pick up quality companies at better share prices. Ill continue to look for companies that are well-positioned to capitalize on near-term pain points, such as weakening consumer spending, higher gas prices and more.

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.