VERSACE: Unsavory economic cocktail points to consumer woes

ANALYSIS/OPINION:

At the place where the economy and the stock market intersect, there were three noteworthy events this past week. First, a fresh round of economic data that pointed to a continued tepid domestic economy. The second event was the first of three presidential debates between President Obama and GOP challenger Gov. Mitt Romney on Wednesday evening. Last, but certainly not least, is the September employment report. While we wait for that report due on Friday from the Bureau of Labor Statistics (BLS), several indicators point to slower job creation in September than in August.

The recent rash of economic data points to more or less what we’ve seen over the last few months on the domestic front — weak demand and rising input prices. Over the last few years, we’ve seen a number of companies look to offset weaker volume with price increases, while others shrink the size of their products while charging the same prices. Most if not all of us have experienced the latter at our local grocery stores when buying cereal, coffee or even ice cream, to name just a few items. What it boils down to is getting less for more, which is simply another form of inflation and another blow to consumer disposable income.

Based on the trend of rising prices paid by purchasing managers, odds are that consumers will see higher prices in the coming months. Couple that with a shrinking labor force, high unemployment and underemployment, and the prospects for the consumer in the coming months are questionable. No wonder the National Retail Federation, the nation’s largest retail trade group, said Tuesday that it expects sales during the winter holiday shopping period in November and December to rise 4.1 percent this year. While that sounds good, this forecast calls for the slowest holiday sales rise in the last few years. According to the NRF, holiday sales rose 5.5 percent in 2010 and 5.5 percent in 2011.

Should that be a surprise? No, not really, because higher prices and weak disposable income aside, the overall domestic economy is growing more slowly this year than last year. That slower growth is weighing on businesses and forcing tough decisions on their capital spending and hiring plans.

Ahead of Friday’s employment report, this week we’ve received snapshots of September job creation from payroll companies ADP and Intuit. ADP reported that the domestic economy added 162,000 jobs in September, which was slower than the 189,000 hired in August. By the way, that 189,000 figure was revised down from ADP’s initial estimate of 201,000.

By comparison, Intuit’s Small Business Index reading for September found only 40,000 jobs were created during the month, down from 50,000 in August. As with the ADP data, Intuit’s findings reinforce the notion of slower job creation in September.

Other readings on September job creation in the form of the Chicago Purchasing Mangers Index, the Empire Manufacturing Index, the Dallas Manufacturing Index, the Richmond Manufacturing Index and the Institute for Supply Management’s Non-Manufacturing Survey results all turned in weak or slower job numbers for the month.

Looking at layoffs, the Challenger Gray “Job Cuts Report” found U.S.-based employers announced plans to cut more jobs in September than in August. Employers have now announced 386,001 planned job cuts in 2012, marking one of the highest number of job cuts in the first nine months of the year since 1997.

Pour all of this into a cocktail shaker, add in concern over the “fiscal cliff,” season with the uncertainty over both the 2012 presidential election and the upcoming corporate earnings season. Shake, pour and garnish, and what you have is a recipe for a likely pullback in the stock market in the coming weeks.

This is particularly true if Friday’s September employment report misses the consensus view calling for the domestic economy to add 113,000 non-farm jobs. With so many employment indicators showing month-over-month declines, it’s hard to see how September can deliver more jobs than August.

Chris Versace is the editor of the PowerTrend Profits newsletter and the ETF PowerTrader trading service as well as a free weekly e-letter PowerTrend Brief. Visit them at ChrisVersace.com or follow him on Twitter @_ChrisVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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