Tuesday, December 20, 2011

Weekly Economic Commentary


Bucking the Trend


Housing, the consumer, and the manufacturing sectors will likely dominate the economic landscape this week in the United States, as the U.S. government’s economic data mills make one final push ahead of the traditional lull in the economic calendar the week between Christmas and New Year’s Day. Of course, the U.S. economic data has taken a back seat to other events in recent weeks, and this week is not likely to be an exception. The debt dilemma in Europe, the final wrangling in Congress over the extension of the payroll tax cut and unemployment benefits, along with the fallout from the death of North Korean leader Kim Jong Il might once again force financial market participants’ focus elsewhere.

The state and local government sector is likely to continue exerting downward pressure on U.S. economic growth in 2012, even after restraining growth in gross domestic product (GDP) in all but three of the 15 quarters since the beginning of 2008.


The Week’s Economic Reports Likely to Take a Back Seat to Washington, Europe and Korea

Even as consumers rush to make their final purchases of the 2011 holiday shopping season — Hanukkah begins on December 20 and ends on December 28, and of course Christmas is December 25 — the government’s data mills are making one last push to get all of the economic data out the door. This week’s dataset in the United States is dominated by housing, manufacturing and the consumer. The housing data due this week includes a mix of reports on sales, prices, starts, permits and sentiment for both November and December 2011. In general, the housing reports due this week are likely to show that the modest recovery in the housing market that began nationally in early 2009 continued through the end of 2011.

Manufacturing is another focus of this week’s data in the United States. In recent months, domestic manufacturing activity has bucked the global trend of deceleration, and has reaccelerated a bit. Part of the reacceleration has come as the global supply chain returned to normal after the Japanese earthquake and tsunami. For example, auto and light truck production in the United States in the latest week (ending December 16) was the strongest since early 2008. Auto and light truck production has not been sustained at these levels since late 2007, prior to the onset of the Great Recession.

This week, data on durable goods orders and shipments in November are likely to provide further evidence that the U.S. manufacturing sector continues to move in the right direction as 2011 draws to a close. Will the likely recession in Europe along with slower growth in China and other emerging markets impact manufacturing in the United States in 2012? It almost certainly will, but it probably already has had an impact. But, despite the slowing, the underlying strength in the manufacturing sector has been stronger than the consensus thought just a few months ago.

Finally, the consumer will be in the spotlight this week as well with the regular weekly reading on retail sales due out on Tuesday, December 20, the University of Michigan’s consumer sentiment index for December on Thursday, December 22, and the November personal income and spending data on Friday, December 23. Consumer spending, which accounts for two-thirds of the overall economy, has been buoyed in recent weeks by a sharp drop in gasoline and other consumer energy prices, better news on the labor market and more stability in the housing market. Last week (December 12 – 16), the National Retail Federation (NRF) — a trade group of the nation’s retailers — raised its 2011 holiday sales forecast by a full percentage point. The group, which forecast a modest 2.8% year-over-year gain in holiday shopping in 2011 back in early October 2011, now says holiday shopping is likely to rise by 3.8% — above the long-term average gain in holiday sales of 2.6%, but below the robust 5.2% sales gain seen during the 2010 holiday shopping season.

In the past, the National Retail Federation has been very conservative in its holiday sales forecasts. Thus, the guidance provided by the NRF last week, along with the return of cold weather to much of the nation in mid-December, and the solid gain in the equity market since September, all suggest that sales are likely to come in at around 4 to 5% when all the receipts are counted. Retailers will report their December sales on Thursday, January 5.


State and Local Governments Likely to Continue to Be a Drag on Economic Growth in 2012

Since the onset of the Great Recession in the first quarter of 2008, the state and local government sector — traditionally a reliable, though modest source of strength for the U.S. economy over the past 30 years — has exerted downward pressure on economic growth amid a major disconnect between revenues and spending. Over that time (15 quarters), the state and local government sector has been a drag on overall GDP in 12 quarters, or 80% of the time. Between the end of World War II and the end of 2007, the state and local government sector made a positive contribution to growth 85% of the time.

As the Great Recession took hold, state and local governments struggled to match declining revenues — as property taxes, corporate taxes, sales taxes, income taxes and fees all were negatively impacted by the downturn — with rising costs. The most visible realignment of costs to lower revenues came in state and local government employment. Since peaking in August 2008, state and local governments have shed nearly 4% of their workers, or more than 610,000 jobs. If anything, that figure probably understates the impact to the overall economy, because it does not take into account that many older state and local government employees are retiring early, and being replaced by lower paid workers, who often are not receiving the same level of benefits.

Looking ahead, the decline in state and local government workers is likely to persist into 2012, though at a more modest pace than over the past three and a half years. As the economy has stabilized in 2010 and 2011, so too have state and local government revenues. However, the Great Recession did little to relieve state and local governments of their obligations to meet mounting post-retirement benefits like healthcare and pension costs for current and former employees. When continued pressure on federal aid to state and local governments is factored in it leaves state and local governments with very little wiggle room to hire any additional workers or make any major commitments to spend on social programs, education or infrastructure projects. Thus, one of the few avenues left for state and local governments to continue to align short and long term costs with revenues is to continue to pare workers and cut back on expansion of existing programs. The net result is likely to be another year in which the state and local government sector provides little support for the overall economy.





_________________________________________________
IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Stock investing involves risk including loss of principal.
International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-031423 (Exp. 12/12)

Monday, December 12, 2011

The Investment Tax Landscape: Countdown to 2013


In December 2010, Congress extended the so-called Bush-era tax cuts by passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. However, for investors, the legislation may represent not a pardon but a stay of execution. While it's true that federal tax rates on income, qualifying dividends, and capital gains have been extended through the end of the 2012 tax year, many of the issues that influenced the debate over tax rate extensions will continue to be the subject of heated discussion. As a result, investors have been granted a reprieve while Congress wrestles with those issues. That's time you can use to think about how best to position your portfolio.

The can won't stay kicked down the road forever
Why should you look at the time between now and 2013 as an opportunity? Because the U.S. budget deficit is at levels that both political parties recognize can't be sustained long-term. Even if Congress canagree on budget cuts, the possibility of higher taxes in the future can't be ruled out.
There are several categories of investors who should be paying particular attention to the planning process in the coming years. They include people with investments that have appreciated substantially in value; people who rely on dividends and bonds to provide them with ordinary living expenses; and people who are considering investing in the newly issued stock of a small business.

Capital gains and dividends
The tax cut extensions gave investors who have large unrealized capital gains some breathing room. Rather than a top tax rate of 20%, long-term capital gains will generally continue to be subject to a maximum rate of 15%, and the rate for investors in the lowest two tax brackets will remain at zero. If you own investments that have appreciated substantially in value and that now represent a bigger portion of your portfolio than you'd like, you have another chance to examine whether it makes sense to unwind those investments before the end of 2012. Taxes obviously are only one factor in making such a decision, of course. However, if you've been considering selling an asset anyway, you've got some time to plan and gradually implement a strategy for doing so.
Two points worth remembering: first, unless further action is taken, the top long-term capital gains rate will increase to 20% after 2012 (a top rate of 10% will apply to investors in the 15% tax bracket); and second, even at the increased level, the rates on those gains would still be relatively low. As recently as 1986, under President Ronald Reagan, the Tax Reform Act of 1986 provided for capital gains to be taxed at the same rates as ordinary income, with a top rate of 28%. To paraphrase Mark Twain, no one is safe when Congress is in session, and there's no guarantee that the top capital gains rate after 2012 might not be increased beyond the scheduled 20% maximum.
Qualified dividends will continue to be taxed through 2012 at the long-term capital gains rates rather than as ordinary income, as they were before 2003 and are scheduled to be again beginning in 2013. The higher your tax bracket and the more reliant you are on dividends for your income, the more you should be aware of the potential impact if that income were subject to higher taxes. Again, many factors will affect your decision about the role of dividends in your portfolio, including the potential for higher interest rates in the future. However, doing some "what-if" analysis might be useful.

Taxable vs. tax-free bonds
Taxable bonds typically pay higher interest rates than municipal bonds. However, if you're in a relatively high tax bracket or expect to be in one in the future, munis can potentially offer a better after-tax return. They may be worth a second look between now and 2013, when--separate from any potential increase in federal income tax rates--the unearned income of people making $200,000 a year ($250,000 for couples filing a joint return) is scheduled to be subject to a new 3.8% Medicare contribution tax. Absent further legislative changes, that could make munis even more attractive for affluent investors.
However, as with any investment decision, there are many factors to consider. Local and state governments have come under severe financial constraints in recent years, and though the default rate on muni bonds has historically been low, default by individual governmental bodies is always possible. Also, the legislation that extended the tax cuts did not authorize continued issuance of Build America Bonds (BABs) beyond 2010. During the almost two years BABs were authorized, many local and state governments used them to tap the taxable bond market; that temporarily reduced the issuance of new tax-free munis. However, since BABs can no longer be issued without further authorization from Congress, the supply of new munis may increase, which could affect prices. Finally, interest rates have been at historic lows since the end of 2008; since bond prices move in the opposite direction from their yields, rising interest rates would not be good news for bond prices.

2013 and beyond
The nation's financial pressures will almost certainly mean continued adjustments to the tax code as 2013 approaches. Though there are no guarantees about what will happen when the new provisions expire, investors generally have another chance to fine-tune their planning efforts while taxes remain historically low. If a bird in the hand is worth two in the bush, why not get expert help in taking advantage of the opportunities available now?



Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2011

College Costs Keep On Climbing


As federal and state budgets continue to shrink due to falling revenues and lawmakers attempts to reign in deficits and spending, the fallout is being increasingly absorbed by current and future college students and their families as they try to deal with the skyrocketing costs of post-secondary education around the country.

Two recent reports from the College Board Advocacy & Policy Center, Trends in College Pricing 2011 and Trends in Student Aid 2011 detail the rapid rise in tuition costs for the nation’s two- and four-year public, private and for-profit colleges and universities. The headline of the report is an 8.3% increase nationally in tuition and fees at public four-year colleges and universities (a 4.5% increase at private four-year colleges) between 2010-2011 and 2011-2012. The report also breaks out the increase state-by-state, however, and to no one’s surprise, California lead the way in tuition and fee increases during the same period.

“California, which enrolls about 10 percent of the nation’s full-time public four-year college students, had the highest percentage increase in published in-state tuition and fees (21 percent) for that sector in 2011-12.”

Those numbers are causing sticker shock to the millions of families trying to cope with current costs or plan for the future, and causing them and their financial advisors to completely re-evaluate their projections. And while the costs continue to rise, it has not become a deterrent for enrollment. Total post-secondary enrollment increased by about 22 percent between 2005-06 and 2010-11 according to the reports as young people clearly realize the importance of a college degree as it relates to future earnings power.

“While the importance of a college degree has never been greater, its rapidly rising price is an overwhelming obstacle to many students and families,” said College Board President Gaston Caperton. “Making matters worse is the variability of price from state to state.”

In California, already one of the nation’s most expensive states to attend college, a recent budget proposal by University of California officials is calling for steep rate increases of up to 16% per year over the next four years if the state doesn’t increase funding to the U.C system. According to a recent Associated Press report,  “In July, UC officials approved a 9.8 percent tuition increase for the current school year -- on top of a previously approved 8 percent -- after the state reduced UC funding by $650 million, or about 20 percent. The system could lose another $100 million if the state generates less revenue than anticipated.”(Chea)1. While the regents have not yet taken action on the newest proposed increases, unless greater funding can be obtained from the state, which seems unlikely, it is hard to imagine that further large-scale increases will not be implemented.

It is important to understand that while the percentage increases in tuition and fees are eye-popping, the published charges are not always an accurate indicator of the actual total costs of attending various universities. The price variability of additional costs such as room and board, is often magnified due to the difference in cost of living from region to region. According to a recent article in the Daily Californian, “Although UC Berkeley’s in-state tuition and fees — which were $8,353 in 2009-10 — are the lowest of all the UC campuses with the exception of UCLA, the high cost of living in the Bay Area makes the total cost for students much higher. According to estimates from the report, the total cost of attending UC Berkeley in 2009-10 was $28,312.” (Bickham)2.

Students are increasingly forced to make tough budgetary decisions in the face of these additional costs in an effort to control their total debt obligations once they have finished school. One of our interns from U.C Berkeley recently explained the measures she and some of her classmates have made to this end: “…on-campus student housing has gotten so expensive, that for this year, 5 of us got together and found a one bedroom apartment to share which costs less than half of what we would be paying for student housing”.

Students are making these kinds of decisions because they are keenly aware that there is no guarantee of a good-paying job waiting for them once they graduate with their degree in-hand. “In the current economic climate, recent college graduates who borrowed for their education face particular challenges in paying back their student loans. The unemployment rate for young college graduates rose from 8.7 percent in 2009 to 9.1 percent in 2010, the highest annual rate on record.”(Reed)3. These numbers closely mirror the current national averages for unemployment which is surprising given that unemployment among college graduates has traditionally been considerably lower than the national average.

The rapidly rising prices of college tuition coupled with the deterioration of the labor market following the recent deep recession have contributed to soaring American student debt, which, by some estimates, now exceeds a trillion dollars and is larger than total US credit card debt. It is no wonder that among current students who are absorbing these higher costs, and recent graduates facing the realities of a stagnant job market, frustration is mounting. The huge debt burdens and the inability to service them are among the main undercurrents of the ‘Occupy’ movements around the country, and the recent clashes on college campuses highlight the growing concerns surrounding them.

Despite the fact that the state and federal governments have slashed funding for public higher education and all indications are that trend will continue for the foreseeable future, they have at least tried to provide some small amount of relief by way of tax credits and continued favorable tax treatment of certain college savings vehicles such as 529 plans. These measures are small consolation however for the growing numbers of over-leveraged, under-employed young people entering the workforce each year fresh out of America’s colleges and universities.

So what does all of this mean for the millions of families that are trying to save for future college costs? Certainly, the importance of a college degree is as great as ever, even if it doesn’t grant the holder an automatic path to financial freedom. Increasingly, we are seeing parents using these current conditions as a teaching moment for their children on the importance of financial literacy and the value of saving. Providing guidance and incentives for children to learn to budget and save for their own educations can have a lasting effect in preparing them for their post-education lives. As always, careful planning and saving are the keys to success, and the earlier the better.




1 Chea, Terence. "UC Tuition Could Nearly Double Under Budget Plan." Huff Post Los Angeles 09 Sept 2011. n. pag. Web. 16 Sept. 2011

2 Bickham, Travis. "UC Berkeley student loan debt less than nation’s average." Daily Californian 07 Nov 2011. n. pag. Web. 9 Nov. 2011

3 Reed, Matthew, Lauren Asher, Pauline Abernathy, Diane Cheng, Debbie Frankle Cochrane, and Laura Szabo-Kubitz. "Student Debt and the Class of 2010." Project on Student Debt. The Institute for College Access and Success, Nov 2011. Web. 9 Nov 2011.

Tuesday, December 6, 2011

Weekly Economic Commentary


The Labor Market Continues Its Long Climb Back


Market participants with the loudest voices and financial media were virtually convinced during the summer and fall of 2011 that the U.S. economy was in, or about to enter, a recession. Our view was, and remains, that the U.S. economy would avoid recession in 2011 and 2012, and the recent run of better-than-expected economic data in the United States has reinforced our view. We expect the U.S. economy to grow about 2% in 2012, which is below the long-term average and the consensus forecast, while emerging market countries post stronger growth and Europe experiences a mild recession.

Our forecast for a economic growth in 2012 is supported by solid business spending and modest, but stable, consumer spending. While inflation may recede early in the year, by year-end it may begin to re-emerge as the impact of a falling dollar, rising commodity prices and the record-breaking monetary stimulus by the Federal Reserve (Fed) begin to be reflected in prices. We expect global growth in 2012 to be supported by solid emerging market growth including the consensus of 8 – 9% growth in China, the world’s second largest economy, while Europe experiences a mild recession.

The Fed’s economic projections, released at the conclusion of the November 2011 Fed policy meeting, call for 2.5 – 2.9% GDP growth in 2012, well above our forecast and the consensus forecast, and an even more robust 3.0 – 3.5% pace of growth in 2013. The Fed’s forecast for the economy represents the upper bound of the range of forecasts for the economy and the labor market for 2012 and beyond, and lies in stark contrast to the financial market and financial media’s dour outlook for the economy next year as noted above.

The Fed surprised investors twice in 2011. First, in August, by announcing its commitment to keep rates at their current low level until at least mid- 2013; and secondly, in September, by announcing a bolder-than-expected Operation Twist, a program to sell short-term Treasuries and buy long-term Treasuries to pressure long-term interest rates lower. In late October 2011, several Fed officials discussed so-called Quantitative Easing 3 (QE3), or another round of large-scale securities purchases, perhaps this time taking place in the mortgage-backed securities market. While we think another program of stimulus from the Fed faces high hurdles, it is clearly leaning towards keeping rates low, which is generally a positive for the bond market.

However, the Fed may find itself increasingly between a rock and a hard place as 2012 matures. Too little growth and the fear of deflation is the “rock” that the Fed has been aggressively focused on avoiding. The Fed is much less concerned about the “hard place,” or the entire stimulus it has provided leading to too much inflation. Now, the distance between the two risks is far apart. However, the Fed may find itself in an increasingly narrow gap between a rock and a hard place as 2012 matures leading to higher yields in the bond market by year-end. While the Fed may have to scramble in 2013 to begin to take up some of the extraordinary amount of monetary stimulus now in the system, in the meantime it is likely that the economy will fail to live up to the Fed’s relatively lofty expectations for growth.


The Labor Market Continued Its Long, Slow Climb Back in November

The solid, but not spectacular November employment report (released on Friday, December 2) points to modest economic growth, not recession, in the fourth quarter. On balance, the details of the November jobs report were mixed, but the report was generally consistent with other data released in recent weeks that suggested a modest improvement in the labor market in November. The survey of businesses within the November employment report revealed that the private sector economy added 140,000 jobs in November, and that the job count in prior months was higher than previously thought. While the result was below both the published consensus (+150,000) and the "whisper number" (175,000 or more), the report generally confirmed further modest improvement in the labor market. The economy shed 8.9 million private sector jobs between late 2007 and early 2010, and has added back just 2.6 million jobs since then. At the current pace of private sector job creation — our forecast is for a gain of around 150,000 jobs per month — it would take another three and a half years to recoup all the jobs lost during the Great Recession.

The survey of households within the monthly employment report revealed that the unemployment rate dropped to 8.6% in November from 9.0% in October. The 8.6% unemployment rate was the lowest since March 2009, when the rate was on the way up to its peak of 10.1%. The media’s focus on Friday was on the stunning 0.4% point drop in the unemployment rate in November. The drop was partly due to an improving labor market, and probably partly the result of some statistical quirks.

The unemployment rate is calculated by dividing the number of unemployed (13.3 million) by the number of persons in the labor force (154 million). In November, the labor force fell by 315,000 while the number of unemployed fell by 594,000. Both readings are relatively large by historical standards. However, in the past 65 years, in 60% of the months in which the unemployment rate drops by at least 0.3% in a month, the labor force also posts a monthly decline. The household survey has its own tally of employment, and that measure increased by 278,000 in November, and has increased by 1.3 million in the past four months. This pace of job growth is consistent with job growth during the economic recoveries in the mid-90s and mid-2000s. It needs to be sustained in the coming months in order for the labor market to continue to heal.

Our view remains that the U.S. economy is likely to grow between 2.5% and 3.0% in the fourth quarter of 2011 and post growth of around 2.0% in 2012. A further, dramatic deterioration of the fiscal and market situation in Europe, a policy mistake here in the United States or abroad, or an exogenous event (terror attack, natural disaster, etc.), among other events, may cause us to change our view.





________________________________________________
IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. The action has subsequently been reexamined in isolation and found to have been more effective than originally thought. As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.
International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-027809 (Exp. 12/12)

Tuesday, November 29, 2011

Weekly Economic Commentary


A November To Remember for the Economy?


Concerns over the eurozone dominated the month of November in the global financial markets, leading to another difficult month for equity market returns and risk assets in general, and another solid month of returns for U.S. Treasuries and other safe-haven investments. While the economic backdrop soured in the eurozone, and continued to slow in China, the U.S. economy held up reasonably well in November, and this week’s batch of economic reports are likely to support that view. Monetary policy will also garner a great deal of attention this week, with a full slate of Federal Reserve (Fed) officials scheduled to speak, along with the release of the Fed’s Beige Book, a qualitative assessment of economic and business conditions in each of the 12 regional Fed districts. No fewer than six global central banks meet to set rates this week; three of the six are likely to cut rates.

Throughout November and indeed over the past several months as well, financial markets have largely ignored the solid, but not spectacular, growth in the United States. Many market participants remain focused on the current and potential impact of the euro-zone crisis on the United States and global economies, and rightly so. A loss of confidence in policymakers, stresses in banking and financial markets, and higher borrowing rates are all ways in which the fiscal mess in Europe may impact the United States and other global economies. A likely recession in the eurozone (and in the United Kingdom) will slow U.S. exports to those areas. The United States sends about 15% of its exports to the eurozone and the United Kingdom. Since 20% of China’s exports head to the Eurozone, China’s export driven economy is likely to slow as well. While the direct impact of a recession in Europe on the global economy would certainly slow global growth, a global recession similar to the Great Recession of 2007 – 2009 is not a foregone conclusion, although many markets are already in the process of pricing in just such an outcome.

Easier monetary policy can offset some, but not all, of the financial market stresses and higher borrowing costs associated with the eurozone fiscal mess. Many emerging market central banks are already easing policy, and developed market central banks, including the Fed, have already begun to use nontraditional measures (such as quantitative easing) to cushion the global economy from the situation in Europe.

Our view remains that the U.S. economy is likely to grow between 2.5% and 3.0% in the fourth quarter of 2011 and post growth of around 2.0% in 2012. A further, dramatic deterioration of the fiscal and market situation in Europe, a policy mistake here in the United States or abroad, or an exogenous event (terror attack, natural disaster, etc.), among other events, may cause us to change our view.

As we wrote in last week’s Weekly Economic Commentary, financial markets continue to ignore the relatively solid run of economic data seen over the past several months, focusing instead on the fiscal crisis in Europe. Nevertheless, the economic data helps to drive earnings prospects in the United States, and earnings are the ultimate driver of stock prices. The economic and corporate data may not matter to market participants today, but once it starts to matter again, some market participants may be surprised by how well the U.S. economy is performing.


Will it be a November to Remember for the United States Economy?

This week, the focus in the United States will be on November data, with key reports on employment, the consumer, and manufacturing. The reports on employment, which include the ADP employment report on private sector hiring in November, the Challenger report on layoff and hiring announcements in November, along with the government’s November employment report, are likely to be consistent with the weekly reports on initial claims for unemployment insurance in November which revealed that the labor market was improving, albeit modestly as the month progressed. The market is looking for about a 150,000 gain in private sector employment in November, following the 104,000 increase in private sector jobs in October and an average monthly gain of 152,900 so far this year. The unemployment rate is expected to remain at 9.0% in the month.

Early reports from the retailers over the just-completed Thanksgiving weekend suggest that the consumer got off to a very good start in the holiday shopping season, confounding the experts who were looking for a more modest gain in sales this holiday shopping season. The market will get more detail on the solid start to the 2011 holiday shopping season as retailers report their November sales (and provide guidance for December) on Thursday, December 1. The market will also digest a report on vehicle sales in November this week. Vehicle sales and production are at three-and-a-half year highs.

The manufacturing sector is also in the spotlight this week, highlighted by the Institute for Supply Management’s (ISM) report on manufacturing for November. The market is looking for a slight expansion in manufacturing activity in November to 51.6 from 50.8 in October. A reading above 50 on the ISM indicates that the manufacturing sector is expanding. A reading above 42 has historically been consistent with growth in the overall economy. The ISM has been over 50 in every month since July 2009, and has been above 42 since April 2009.

As previously noted, monetary policy will also be in focus this week, with the release of the Fed’s Beige Book, accompanied by a full roster of Fed speakers. We continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the consensus expectation (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecasts for economic growth and the unemployment rate remain more optimistic than the consensus.

The Beige Book is once again likely to be dominated by the word “uncertain”. The words (or derivations of the word) appeared 26 times in the Beige Book released in October and 33 times in the Beige Book released in early September 2011. Europe, the super committee, the economic outlook and the holiday shopping season are all likely to be mentioned in this edition of the Beige Book, which is being prepared ahead of the December 13 FOMC meeting.

There are a number of Fed officials slated to make public appearances this week, but the only member of the Fed’s “center of gravity” set to speak this week is Vice Chair Janet Yellen. We continue to look to the Fed’s “center of gravity” — Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley — rather than the fringes of the Fed, for any shift in tone.

Outside of the United States, no fewer than six central banks meet this week to set policy and three of the six (Brazil, Thailand, and the Philippines) are expected to cut rates, in part to help combat the impact of the Eurozone debt debacle on their domestic economies. China’s central bank, the People’s Bank of China (PBOC), does not have a set meeting schedule. However, the PBOC is watching the domestic inflation data in China closely, and may choose at any time to reverse some of the restrictive monetary policy it put in place between early 2010 and mid-2011. The official Chinese ISM report (commonly referred to as the PMI) for November is due out this week, and could provide a catalyst for the PBOC to act, especially if the report shows — as expected — that manufacturing in China contracted in November 2011 for the first time since early 2009.







______________________________________________________
IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The Beige Book is a commonly used name for the Fed report called the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is published just before the FOMC meeting on interest rates and is used to inform the members on changes in the economy since the last meeting.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-026045 (Exp. 11/12)

Tuesday, November 22, 2011

Weekly Economic Commentary


Leading The Way


Concerns over the eurozone are likely to continue to dominate the investing landscape this week, but the super committee’s failure, a full slate of economic data, the minutes of the November 1 – 2 Federal Open Market Committee (FOMC) meeting, along with the build up to “Black Friday”, the unofficial start of the holiday shopping season, will also compete for the market’s attention.

The data in the United States this week include manufacturing (durable goods orders, Richmond Fed, Kansas City Fed, and Dallas Fed), existing home sales, personal income and spending, and the regular weekly readings on initial jobless claims and retail sales. The market continues to ignore the relatively solid run of economic data seen over the past several months, focusing instead on the fiscal crisis in Europe. Nevertheless, the economic data helped to drive earnings prospects in the United States, and earnings are the ultimate drivers of stock prices. The economic and corporate data may not matter today, but once it does start to matter again, some market participants may be surprised by how well the U.S. economy is performing in the fourth quarter.

Orders for core durable goods (business capital equipment expected to last more than one year, excluding defense and aircraft), are expected to post a month-over-month decline in October — as is often the case as the most orders tend to be placed at the end of the quarter, pulling forward demand from the first month of the following quarter. The expected decline in October would mark the fourteenth consecutive time that core orders posted a month-over-month decline in the first month of the quarter (i.e. January, April, July and October). The durable goods data — along with virtually all of the other data we monitor — is seasonally adjusted, and should help to smooth out these anomalies, but this one persists. We will focus on the other aspects of the report (shipments, backlog of new orders, etc.), and we and the markets will discount a mild decline in core orders in October and place more weight on the regional Fed surveys (Kansas City, Dallas and Richmond) of manufacturing for November due out this week.

The release of the minutes from the November 1 – 2 FOMC meeting this week is likely to reignite talk about the internal discord at the Fed, the Fed’s next policy move, and the Fed’s latest forecast for the economy. We will continue to watch the “center of gravity” — Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley — for any shift in tone at the Fed, and continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the market’s expectations (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecasts for economic growth and the unemployment rate remain more optimistic than the market’s.

Expectations for the holiday shopping period are low. The National Retail Federation is expecting just a 2.8% gain in holiday sales in 2011 versus 2010, while the International Council of Shopping Centers is projecting a gain in holiday sales of between 2.2% and 3.5% from a year ago. ShopperTrak, a group that tracks the number of shoppers at malls, is looking for a 3.0% year-over-year gain in holiday sales, despite a 2.2% drop in foot traffic at the malls this holiday season versus a year ago.

Looking at the relationship between equity market performance and holiday shopping trends over the past 20 years suggests that equity prices drive shopping, not the other way around. Despite the 6% drop in U.S. equity prices over the past week or so, the equity market’s performance since mid-September suggests that holiday sales will increase by between 4.5% and 6.0% from a year ago. Thus, the market has a slightly better outlook for the holiday shopping season than the pundits do, although this does set the bar a bit higher should sales disappoint.


Index of Leading Economic Indicators Place Low Odds on Recession in the Next 12 Months

The index of leading economic indicators (LEI) rose a larger-than-expected 0.9% month-over-month in October, the largest month-over-month increase since February 2011. The October LEI was released on Friday, November 18. The 0.9% month-over-month gain was the sixth consecutive increase, and the twenty-ninth gain in the past 31 months dating back to early 2009. The consensus of economists surveyed by Bloomberg News expected just a 0.6% month-over-month increase in the LEI in October. The gain in October was broad-based as nine of the ten components of the LEI increased in the month. Only vendor deliveries — a measure of the backlog of businesses new orders — were a detractor from the index in October. Because virtually all of the ten components of the LEI are known to the market prior to the release of the report, the LEI is rarely market moving, even when it surprises like it did in October.

The LEI is designed to predict the future path of the economy, with a lead time of between 6 and 12 months. The 0.9% month-over-month increase in the LEI in October pushed the year-over-year gain in the LEI to 6.6%. Over the past 50 years (1962 to today), the year-over-year increase in the LEI has been at least 6.6% in 93 months. Not surprisingly, the U.S. economy was not in a recession in any of those 93 months. Thus, it is highly unlikely that the economy was in recession in October, despite the ongoing fiscal and political turmoil in Europe, the fiscal uncertainty here in the United States and the slowdown in economic growth in China.

But, the LEI is designed to tell market participants what is likely to happen to the U.S. economy, not what has already happened. Three months after each of the 93 months that the LEI was up 6.6% or more, the economy was never in recession. The same is true six months after the LEI is up by 6.6% or more on a year-over-year basis. Looking out 12 months after the LEI is up 6.6% or more, the economy was in recession in just six of the 93 months, or 6% of the time. For the record, those six months all occurred in 1972 and 1973, when the LEI was up strongly in late 1972 and early 1973. The Arab oil embargo — and an overnight tripling of consumer energy prices — in October ‘73 triggered a recession. Aside from that unusual episode, the current strong year-over-year reading on the LEI suggests virtually no chance of recession in the next 12 months.

However, the LEI says the risk of recession in the next 12 month is negligible (6%), but not zero. We would agree. But, the financial markets — along with the historically low level of consumer sentiment — are telling us that the risk of recession is much higher than 6%. Our view remains that the U.S. economy is likely to grow between 2.5% and 3.0% in the fourth quarter of 2011 and post growth of around 2.0% in 2012. A dramatic deterioration of the fiscal and financial situation in Europe, a policy mistake here in the United States or abroad, or an exogenous event (terror attack, natural disaster, etc.), among other events, may cause us to change our view. Market participants continue to assess what impact a potential recession in Europe and slowdown in emerging markets will have on the U.S. economy, and when that impact is likely to be felt.





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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The index of leading economic indicators (LEI) is an economic variable, such as private-sector wages, that tends to show the direction of future economic activity.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-024993 (Exp. 11/12)

Tuesday, November 15, 2011

Weekly Economic Commentary


Moving to the Muddle


The ongoing political and financial turmoil in Europe is likely to draw most of the market’s attention this week. Against that somewhat unsettling backdrop, market participants will digest a relatively busy slate of U.S. economic data for October and November, as well as a full docket of appearances by Federal Reserve (Fed) officials.

With only a scattering of earnings reports and guidance for the third quarter of 2011 remaining, this week’s full slate of economic reports and heavy schedule of Fed speakers will compete with the economic and fiscal turmoil in Europe for the market’s attention. Participants continue to assess what impact a potential recession in Europe and slowdown in emerging markets will have on the United States economy, and when that impact is likely to be felt.

The European summit of late October 2011 produced measures that were clearly a positive and removed the extreme risks in our view. However, details will be slowly forthcoming in the months ahead and implementation risks remain. Delays or disruptions could undermine market confidence and lead to bouts of safe-haven buying of Treasuries. Furthermore, should European economic growth be weaker than expected, investors may deem recently agreed upon safeguards as insufficient and peripheral European government bond weakness may create safe-haven buying of Treasuries.

Looking ahead, developments in Europe will remain a major market driver in the weeks and months ahead, and well into 2012. We believe a financial crisis and accompanying deep global recession erupting from the European debt problems has a small, but not insignificant, chance of taking place. We will continue to monitor the developments and signs of stress in the European banking and sovereign funding markets. But, as Europe muddles along, we believe investors are better served to watch the real-time indicators of economic performance as a guide to market behavior.

This week is a very busy week for U.S. economic data, including reports on:

·         Housing: November homebuilders sentiment, October housing starts, third quarter mortgage delinquencies and foreclosures

·         Inflation: consumer price index (CPI) and producer price index (PPI) for October

·         Manufacturing: industrial production for October, Philly Fed and Empire State Manufacturing indices for November

·         The consumer: October retail sales and weekly retail sales for the week ending November 12


In addition, the weekly reading in initial claims for unemployment insurance will be closely watched as this data set in recent weeks has suggested some positive momentum in the labor market.

In addition to the data, there are a number of Fed speakers on tap this week, although Fed Chairman Bernanke is not among them. This week’s Fed speakers lean a bit toward the “dovish” side (Fed officials who favor the full employment side of the Fed’s dual mandate of low inflation and full employment), although some notable “hawks” (Fed officials who favor the low inflation side of the Fed’s dual mandate) are on the schedule as well. We will continue to watch the “center of gravity” at the Fed - Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley - for any shift in tone. Of the three, only Dudley is slated to speak this week. The Fed will release the minutes of the November 1 – 2 Federal Open Market Committee (FOMC) meeting on November 22, and the next Beige Book, a qualitative assessment of business and financial conditions in each of the 12 regional Fed districts, is due out on November 30. The next FOMC meeting is December 13.

We continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the market’s expectations (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecasts for economic growth and the unemployment rate remain more optimistic than the market’s.





_____________________________________________
IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Core CPI is a subset of the total Consumer Price Index (CPI) that excludes the highly volatile food and energy prices. It is released by the Bureau of Labor Statistics around the middle of each month. Compare to Personal Consumption Expenditures (PCE); Core PPI; Producer Price Index (PPI).
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-022964 (Exp. 11/12)

Tuesday, November 8, 2011

Weekly Economic Commentary


Can The Labor Market JOLT the Economy?


The upcoming week (November 7 – 11) is heavy on speakers from the Federal Reserve (Fed) and relatively light on U.S. economic reports, providing markets ample time to reflect on the October employment report and to focus on the deliberation of the congressional super-committee and the latest news in Europe. The next round of Chinese economic data for October is due out this week, as the market continues to debate the hard landing/soft landing issue in China. We will continue to watch the “center of gravity” at the Fed — Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley — for any shift in tone.

Aside from the regular weekly reports on retail sales and initial claims for unemployment insurance, none of this week’s batch of economic data in the United States is likely to be market moving. There are a number of Fed speakers this week, as market participants mull over last week’s Federal Open Market Committee (FOMC) meeting as well as the press conference held by Fed Chairman Bernanke. This week’s speakers range from very hawkish (Fed officials known to favor the low inflation side of the Fed’s dual mandate from Congress) to very dovish (Fed officials known to favor the full employment side of the dual mandate). The hawks slated to speak this week are Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota. The doves on the docket this week are San Francisco Fed President John Williams, Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren.

It is likely that the hawks will say that the Fed is putting too much monetary stimulus in the system, and equally as likely that the doves will say the Fed needs to do even more to support the economy. While the media will likely focus on the extremes, we will continue to watch the Fed’s “center of gravity” — Bernanke, Yellen and Dudley — for any shift in tone at the Fed. Two of the three (Bernanke and Yellen) are set to make public appearances this week. We continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the market’s expectations (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecast for economic growth and the unemployment rate remains more optimistic than the market’s. The next FOMC meeting is in mid-December.

This week’s economic calendar is filled mainly with second-tier reports on the economy and with little in the way of corporate earnings news on tap this week, markets are likely to continue to focus on Europe, the super-committee’s deliberations on the federal budget and on the full docket of Chinese economic reports for October.

Unlike most developed markets (and most emerging markets), where the economic data calendar is set well in advance, the Chinese economic data calendar is relatively flexible. Reports on Chinese industrial production, retail sales, exports and imports, and perhaps money supply and new loans are likely to be released this week, as market participants continue to debate whether or not Chinese authorities can guide China’s economy, the world’s second largest, to a soft landing. Although fears continue to swirl in the marketplace about a so-called “hard landing” — a sharp and unwanted slowdown in economic growth in China to around 5 or 6% from the current growth rate around 9% — our view remains that China can achieve soft-landing growth of 7 to 8%, and that Chinese authorities are close to taking steps to stimulate the Chinese economy. In our view, fears of a hard landing in China (and related issues like China’s banking system and property market) are waiting in the wings to replace Europe and the U.S. fiscal situation as the financial market’s concern du jour.


The JOLTS Data and the Labor Market

One report due out this week that we like to watch, but one the market seems to ignore, is the job openings and labor turnover (JOLTS) report. The JOLTS report does not get a lot of attention, mainly because it is dated (the report due this week is for September), and the market already has plenty of information on the labor market in October. However, the JOLTS data provides more insight into the inner workings of the labor market than the monthly employment report does.

JOLTS provides data on:

·         The number of job openings (there were just over three million open jobs at the end of August)
·         The number of new hires in a given month (four million positions were filled in August)
·         Job separations (just under four million people left jobs in August)


The data is conveniently broken down by industry group and by region as well. On the surface, the data reveals just how dynamic the U.S. labor market is, demonstrating how the economy creates (and destroys) tens of millions of jobs a year. Digging a little deeper, one of our favorite components of the JOLTS data can be found within the data on job separations.

People are separated from their jobs either voluntarily (they retire or quit to take another job) or involuntarily (they are laid off or fired from their jobs). As noted above, just under four million positions were eliminated in August. About half of these (two million) came as a result of people leaving their current positions voluntarily. While not quite back to “normal” — during the mid-2000s economic expansion in the United States, roughly 55% of job separations were the result of workers voluntarily quitting their jobs — the percentage of job quitters in August was far above the recession lows. In early 2009, during the worst of the Great Recession, only 37% of separations were voluntary, suggesting that layoffs and downsizing accounted for nearly two-thirds of job separations. The steady climb higher in recent months of the number of job separations that are voluntary suggests that the labor market is healing, albeit slowly, as individuals are becoming more and more confident in the labor market. After all, you would not likely leave a job in today’s environment unless another job was waiting for you.

As noted in last week’s employment report for October, the labor market is healing, but still has a long way to go. The data further undercuts the notion that the economy is in, or about to enter, a recession, although it does suggest only sluggish growth (2.0 to 2.5% GDP growth). The economy created 80,000 jobs in the month (expectations were for an increase of 125,000), but the job count in the prior two months was revised up by a combined 102,000, taking some of the sting out of the below-consensus October reading. The private sector created 104,000 jobs in October, as state and local governments shed another 22,000 jobs.

Over the past three months, the private sector has added an average of 122,000 jobs per month; good, but not great. The private sector economy shed 8.8 million jobs between December 2007 and February 2010, but has added just 2.8 million of those jobs back since then, creating jobs in each of the past 20 months in the process. The increase in the number of private sector jobs over the past 20 months is in line with the pace of job creation seen during recoveries from the last two recessions (1990 – 91 and 2001). The payroll job count data is culled from a survey of 440,000 business establishments across the country.

The unemployment rate, calculated from a survey of 60,000 households across the country — a huge sample size for a national survey given that most polling on national elections survey only a few thousand people at most — dipped 0.1% to 9.0% in October. The unemployment rate is calculated by dividing the number of unemployed persons (about 14 million) by the total number of people at work or looking for work (about 154 million). The details of this household survey were solid, as the survey's count of employment increased by 277,000, the third consecutive sizeable gain (275,000+). The number of persons in the labor force (at work or looking for work) increased for the third consecutive month as well.

On balance, the labor market remains stuck in neutral. The economy is growing just enough to produce some job growth, but not quickly enough to substantially lower the unemployment rate or the number of people filing for new unemployment benefits each week. In short, the economic and policy uncertainty that is restraining the rest of the economy is still clearly being felt in the labor market, and only a resolution of that uncertainty will lead to an improved labor market in the months and quarters ahead.






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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Job Openings and Labor Turnover Survey (JOLTS) is a survey done by the United States Bureau of Labor Statistics to help measure job vacancies. It collects data from employers including retailers, manufacturers and different offices each month. Respondents to the survey answer quantitative and qualitative questions about their businesses' employment, job openings, recruitment, hires and separations. The JOLTS data is published monthly and by region and industry.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-021222 (Exp. 11/12)