The actions of businesses and governments to increase the employment rate, to increase the number of jobs in the economy, are referred to as “job creation.” In times of recession or economic contraction, job creation becomes a priority of government. Since the primary goal of corporation is profit, job creation on the private level often occurs only when economic conditions warrant the risk for businesses to grow and when successful marketing and goods/services development requires businesses to expand.

Consumer spending remains fragile and will impact the retail sector and gross domestic product (GDP). The key drivers are jobs and wealth generation from such sources as stocks and housing.

In the retail sector space, sales have been largely mixed, with discounters and big-box stores faring the best, as shoppers flock to Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST), along with the increasingly popular dollar stores and the massive hyper-supermarkets.

The reality is that consumer spending drives GDP growth. The way consumers spend will likely dictate how the economy will fare in 2012. With consumer spending accounting for about 70% of the GDP growth in this country, it will be critical to get consumers to spend.

Spending on big-ticket items continues to be fragile. Durable Goods Orders fell 4.2% in March, well below the drop of 1.7% expected and the 1.9% gain in February. Excluding transportation, the reading fell 1.1% compared to the 1.9% gain in February.

In March, retail sales excluding auto increased 0.8%, down from 0.9% growth in February, but above the 0.6% estimate.

Job creation is the most critical variable for the retail sector. The weekly initial claims have been below the threshold 400,000-level for weeks.

In March, a disappointing 120,000 jobs were created, well below the 200,000 estimate and the 240,000 in February. The jobless rate was 8.2%, which is an improvement, but it’s still too high for a healthy economy and could strangle growth in the retail sector.

The Fed estimates that the unemployment rate will hold above eight percent this year. Moreover, economists feel the economy needs to create at least 500,000 new jobs monthly to drive growth. Of course, I do not expect this will happen until at least 2013.

A strong U.S. housing market is also critical for the retail sector, as homeowners tend to buy new furnishings, including many big-ticket items. This is not happening as home prices continue to decline dragged down by continued high foreclosures and short sales where homes are dumped at below the mortgage value.

The key Case-Shiller 20-city Index remains weak and shows price declines continuing across America. If home values decline, consumers will tend to hold back on spending; thereby impacting the retail sector.

The reality is that foreclosures are driving the buying and this does not reflect well for housing price appreciation. It may not be until 2013 until prices steadily rise.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

Technology will continue to be a top growth area, which I discussed in Apple & Technology Stocks Looking Like Great Investment Opportunities.

Another economic indicator comes in weaker than expected, throwing more cold water on the economic recovery theory.

Consumer credit increased in February 2012 at the slowest pace in four months, coming in at only $8.7 billion for the month. Estimates were for a $12.0-billion rise!

I want to focus on revolving consumer credit, which mostly measures the amount of credit card debt in the U.S.—a better reflection of consumer spending, as it removes student loans and car loans from the numbers.

The latest numbers from the Federal Reserve show that credit card borrowing was down $2.21 billion in February and down $2.95 billion in January. Economists were expecting a rise in credit card debt—consumer spending—for both months, which makes this a significant miss and once again puts the economic recovery into question.

Thus far in 2012, credit card growth is contracting, not expanding, which means there is less consumer spending. Of important note, this was the largest drop in a year in consumer credit, which means that the pace of slowing consumer spending is accelerating.

Since the crisis began, consumer credit has yet to return to 2007 levels. Consumer credit is currently 18% below that level!

Since consumer spending is 70% of gross domestic product (GDP), this does not bode well for the economic recovery many people say we are experiencing in 2012.

Consumers are either paying down existing debt, are unable to afford to expand their credit card debt because of the poor jobs market, or are not confident enough in their near-term prospects to take on new debt through consumer spending.

I would further argue that, with real disposable income falling, consumer spending has no choice but to contract, because incomes are not keeping up with inflation. These contracting consumer credit numbers further confirm this line of thinking.

Let’s not forget that, against the backdrop of contracting consumer spending, student loans outstanding are over $1.0 trillion for the first time in American history. Car loans also continue to expand at a rapid rate.

I’m that concerned student loans and car loans are too easy for students and consumers to get in 2012. With the difficult jobs market, many students hope an education will better their job prospects, so they are forced to return to school with a student loan.

Car loans at almost zero interest rates are another way to make a consumer feel wealthy and maintain consumer spending habits. However, if true wealth is not being created through an economic recovery, how can such consumer spending be maintained?

Consumer credit card debt is contracting, which illustrates how weak consumer spending is and how weak this economic recovery is. Just because it is easier for consumers to obtain a student loan and/or a car loan, doesn’t mean it is a reflection of consumer wealth. (Also see: Consumer Stress Levels Reach Highs Not Seen Since 2009.)

Watch out for what they tell you about that economic recovery, as I haven’t seen it yet.

Michael’s Personal Notes:

Small businesses are a critical part of the job creation that occurs in the U.S. Small firms accounted for 48.5% of the job creation in 2011, and 51.6% of the job creation year-to-date (source: ADP).

Since many are saying that an economic recovery is taking hold in the U.S. (which means job creation is only going to improve in 2012), I thought I’d revisit the small business index to see if this economic strength and job creation were being reflected there.

The National Federation of Independent Business released its latest index readings—for March—that fell to the lowest level since November of 2011! Furthermore, its Expectations Index, which measures small business confidence in the next six months, dropped two points below February’s reading, further questioning how job creation will occur in this country.

Not only are these readings not exhibiting any strength, but also these 25-year historically low readings are more commonly found during recessions!

As with last month’s survey, which I wrote about in these pages, the number one concern among small business owners going forward continues to be poor sales visibility.

Small business’ number two concern is inflation; the biggest jump in inflation concern since 2008!

Small businesses are concerned about commodity prices. As large businesses are saying that margins are being squeezed by commodity prices and Profit Confidential’s readership says inflation is a problem, we should all stop complaining, because the Federal Reserve says such inflation pressures are transitory…

Is this the backdrop for a strong jobs market and job creation?

More and more of small businesses have said they were going to stop lowering prices, while many more have raised prices and will continue to raise prices because of the rising inflation they are experiencing. These higher prices mean that the consumer will be paying more for goods and services in this weak economy!

The number of small business owners making capital expenditures fell in March, reversing the small gains made in January and February. The capital expenditures level fell to the lowest level since 2010. If small businesses are not confident enough to invest—capital expenditures—then how can job creation occur in this country?

In the last four months, the number of small businesses that said they were going to create new jobs has continued to fall. How is the jobs market going to improve with these kinds of statistics and where is the job creation going to come from? (Also see: Pathetic Job Numbers Expose Fake Economic Recovery.)

The above is a blatant warning to those who believe what the mainstream media is telling us about the supposed economic recovery in the U.S. Small businesses are disagreeing with what we have been told about the economic recovery. And since small business is a large part of the job creation in this country, I’m going to listen to what small business is saying.

Where the Market Stands; Where it’s Headed:

A huge top is being put in right now for the stock market.

For our technical analysis readers, the right shoulder formation of a head-and-shoulders pattern is almost complete. For our fundamental readers, the bear market rally in stocks that started March of 2009 is getting close to the end of its cycle.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

Small businesses are a critical part of the job creation that occurs in the U.S. Small firms accounted for 48.5% of the job creation in 2011, and 51.6% of the job creation year-to-date (source: ADP).

Since many are saying that an economic recovery is taking hold in the U.S. (which means job creation is only going to improve in 2012), I thought I’d revisit the small business index to see if this economic strength and job creation were being reflected there.

The National Federation of Independent Business released its latest index readings—for March—that fell to the lowest level since November of 2011! Furthermore, its Expectations Index, which measures small business confidence in the next six months, dropped two points below February’s reading, further questioning how job creation will occur in this country.

Not only are these readings not exhibiting any strength, but also these 25-year historically low readings are more commonly found during recessions!

As with last month’s survey, which I wrote about in these pages, the number one concern among small business owners going forward continues to be poor sales visibility.

Small business’ number two concern is inflation; the biggest jump in inflation concern since 2008!

Small businesses are concerned about commodity prices. As large businesses are saying that margins are being squeezed by commodity prices and Profit Confidential’s readership says inflation is a problem, we should all stop complaining, because the Federal Reserve says such inflation pressures are transitory…

Is this the backdrop for a strong jobs market and job creation?

More and more of small businesses have said they were going to stop lowering prices, while many more have raised prices and will continue to raise prices because of the rising inflation they are experiencing. These higher prices mean that the consumer will be paying more for goods and services in this weak economy!

The number of small business owners making capital expenditures fell in March, reversing the small gains made in January and February. The capital expenditures level fell to the lowest level since 2010. If small businesses are not confident enough to invest—capital expenditures—then how can job creation occur in this country?

In the last four months, the number of small businesses that said they were going to create new jobs has continued to fall. How is the jobs market going to improve with these kinds of statistics and where is the job creation going to come from? (Also see: Pathetic Job Numbers Expose Fake Economic Recovery.)

The above is a blatant warning to those who believe what the mainstream media is telling us about the supposed economic recovery in the U.S. Small businesses are disagreeing with what we have been told about the economic recovery. And since small business is a large part of the job creation in this country, I’m going to listen to what small business is saying.

Where the Market Stands; Where it’s Headed:

A huge top is being put in right now for the stock market.

For our technical analysis readers, the right shoulder formation of a head-and-shoulders pattern is almost complete. For our fundamental readers, the bear market rally in stocks that started March of 2009 is getting close to the end of its cycle.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

In the recent months, we have been able to shift our focus away from the eurozone and concentrate on the economic renewal in the U.S. Yet, as I have been saying, you cannot forget the risk in the eurozone and Europe. GDP growth in the eurozone is muted and the heavy debt loads have destroyed Greece, which had to receive two rounds of emergency capital in excess of $330 billion in order to stay afloat and avoid a financial Armageddon.

Greece will face decades of hardship. It will be very difficult for Greece to expand and grow its extremely fragile economy. The austerity measures are not popular and will wreak havoc. It could be decades before the country can emerge out of its crisis mode. Take a look at Japan, which has been caught in its mini recessions and stagnant growth for over 20 years, as I discussed in China & India vs. Japan: The Best Place to Put Your Capital.

With Europe and the eurozone still trying to find their legs and struggling to grow, I firmly believe there will be more issues down the road and likely sooner than later.

Spanish bond yields are rising again at over six percent. The feeling is that bond yields of over seven percent are dangerous and represent a red flag. Investors demand higher yields to compensate for the added risk of investing in countries such as Spain. Just think back to Greece where the bond yields at one point were above 90%! And take a look at what happened as the country was allowed to move into a controlled default and investors holding the bonds had no choice but to absorb a loss of about 75% on their investments.

On Tuesday morning, the International Monetary Fund (IMF) came out and said it was more optimistic about the global economies and pleased with the broad measures to deal with the debt issues in Europe and the eurozone. The IMF pegged U.S. GDP growth at 2.1% this year, which is okay but nothing to get excited about.Europe is estimated to see its economy contract by 0.3%. The one thing I can agree with is the IMF’s assessment that the eurozone debt crisis will be the most significant risk to the global economies.

You only have to take a look at China to see the negative impact of a slower Europe and eurozone on the massive idling manufacturing facilities in China, which is facing slowing.

And then you still have the risk in Portugal, Ireland, Italy and Spain. These countries are not on solid ground.Portugal and Ireland have already received handouts and will likely ask for more funds if Europe stalls. Italy is also sitting on a massive mountain of debt.

But the carnage is not confined to these countries. The two biggest countries in the eurozone, Germany and France, are also facing their own difficulties.

So, while traders are focused on the economic renewal and job creation in the U.S., the eurozone region remains a high risk area vulnerable to continued stalling. Before the global economies move into sustained recovery, the eurozone must expand and rebound. Even if the U.S. economy strengthens, we need to see demand growth out of Europe in order to feel more confident in the sustainability of growth in the U.S. and elsewhere.

The bulls have been in full control for the past three years, but with the key stock indices at multi-year highs, it’s time to pause and take a look at where we are with my market view.

On Wednesday, stocks plummeted after several days of hesitation on the charts. My market view is that traders appear to be looking more for reasons to sell than to buy.

With the S&P 500 at its highest level since 2008, I expect to see some hesitancy. My market view is that stocks have had an amazing run so far this year and could pause.

Triggering the selling on Wednesday was the non-response by the Federal Reserve on additional stimulus (aka QE3). The Fed appears to be content with what it has done so far, but at the same time warned that the jobs growth may stall should the economic renewal pause.

The private ADP jobs report was softer than expected, which in my market view may signal a soft non-farm payrolls on Friday with jobs growth estimated at 200,000 jobs, down from 227,000 in February. For a healthy jobs market, you want to see job creation at around 500,000 monthly. I still have concerns towards the jobs market, which I discussed in Don’t Tell the Unemployed the Good Times are here. (PC031212)

The risk in the eurozone is also prevalent, with speculation of another recession looming. Spain received a poor response to its bond auction. With a high unemployment rate and muted growth in Spain, things will not be easy in my market view.

The Chicago Board Options Exchange Market Volatility Index (VIX)—a measure of option volatility for the S&P 500 often known as the “fear gauge”—remains low at around 16. This is the lowest level since May 2011, when the S&P 500 was trading around the 1,350 level. A low VIX reading may indicate that traders are too lax and represent a contrarian signal of pending weakness.

Note the inverse relationship of the VIX and S&P 500 since October 2011. Should the VIX rise, we could see a corresponding decline in the S&P 500.

Chart courtesy of www.StockCharts.com

The current valuation is reasonable in my market view, but the degree of the buying is overdone.

All eyes will be focused on the first-quarter earnings season, which will begin with Alcoa, Inc. (NYSE/AA) reporting on Tuesday.

The news doesn’t look promising for earnings at this juncture. Based on the current estimates, earnings growth is estimated to be 3.2% for the first quarter, following 9.2% growth in the Q4, according to Thomson Reuters. The Q1 reading tends to be low, but should move higher as earnings are reported. Earnings growth in the Q2 is estimated at 9.2%.

The two top-performing earnings expected for the Q1 are Industrial’s  (+10.3%) and Financials (+8.3%). Technology (+16.8%) was the second top gainer in the Q4. The two weakest areas of earnings growth in the Q1 are expected to be the same as the Q4: Telecom (-14.1%); and Materials (-15.6%).

It’s going to be an interesting few weeks ahead of us. If earnings don’t deliver, my market view is that stocks may be stuck on the charts.

And don’t forget there’s a historical pattern that suggests traders move away from stocks in May and come back in the fall for the best results.

My suggestion is to use put option as hedge protection and write short-term covered call options to generate some premium income should markets stall.