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.

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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 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)

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)

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)

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.

_________________________________________________

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)

Weekly Economic Commentary

What a Surprise

As is often the case during the first week of the month, this week is an extremely busy one for economic data. But the data, which includes key reports on ISM, chain store sales and the labor market in October, may be reduced to a side show, given all of the other potentially market moving events on tap this week. Last week’s batch of economic data — including the third quarter gross domestic product (GDP) report-marked yet another week that the economic data in the United States surprised to the upside. How much longer can the data continue this pattern?

This week (October 31 through November 3) is chock full of key economic reports in the United States. But the data itself may only be a side show given the myriad of policy and corporate events also competing for the market’s attention this week. The key reports this week include the Institute of Supply Management’s (ISM) report on manufacturing for October, the chain store sales data for October and of course the October employment report. However, there are several other potentially market moving events on tap, including:

·         Vehicle sales for October

·         Challenger layoff announcements for October

·         ADP employment change for October

·         Initial claims for unemployment insurance for the week ending October 29

·         Weekly retail sales for the week ending October 29

·         The ISM’s non-manufacturing survey for October

In addition, the October ISM report for China is set to be released late Monday night, October 31, as 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 a soft landing, and that Chinese authorities are close to taking steps to stimulate the Chinese economy.

The ISM report in the United States is expected to show that manufacturing sentiment improved slightly in October, but remained well below its early 2011 peak. The ISM peaked above 60 (a reading above 50 suggests that the manufacturing sector is expanding, while a reading below 50 suggests that the manufacturing sector is contracting) in early 2011. But the ISM almost never stays above 60 for very long. In fact, during the middle part of expansions (mid-1980s, mid-1990s and mid-2000s) the ISM often dips below 50 for a month or two without signaling a recession. Historically, a reading on the ISM below 42.5 is consistent with a recession in the United States.

The consensus for the October ISM report (based largely on the October readings from the various regional Fed manufacturing surveys that have already been released) is for the ISM in October to move slightly higher to 52.0 from 51.6 in September. The low estimate (among the 82 estimates compiled by Bloomberg) is 50.5 while the high estimate is 53.7. Thus, it would likely take a reading below 50 or above 54 to substantially move markets when the data are released at 10 AM eastern time on Tuesday, November 1. The market will also want to pay close attention to the new orders and employment components of the ISM report. The new orders component is a solid indicator of future manufacturing activity, and the employment reading can provide some insight into the labor market in the manufacturing sector. The employment reading within the ISM has been above 50 in each of the past 24 months dating back to October 2009.

Jobs remain a key concern for markets, and the October employment report will provide a comprehensive look at the labor market in the month. Our view remains that the labor market is 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, policy and regulatory 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.

The unemployment rate — which is derived from a survey of 60,000 households — is expected to remain at 9.1% in October. The unemployment rate is calculated by dividing the number of unemployed persons seeking work (about 14 million) by the number of people in the labor force (about 154 million). A 9.1% reading in October would mark the fourth consecutive month at 9.1%, demonstrating some stability in the labor market, but no improvement. The unemployment rate peaked at 10.1% in October 2009, but was as low as 4.4% as recently as early 2007.

The monthly job count is derived from a survey of businesses (140,000 businesses representing more than 400,000 worksites) and has been conducted each month for more than 60 years. The market is expecting an increase of 125,000 private sector jobs in October, a slight deceleration from the 137,000 private sector jobs created in September. Year-to-date through September, the economy has created an average of 150,000 private sector jobs per month. This is about the same pace at which the labor force increases each month, which helps to explain why the unemployment rate has remained around 9.0% this year. While the private sector is expected to have added about 125,000 jobs in October, the public sector (federal, state, and local governments) is expected to see another drop in jobs. In particular, the state and local government sector has shed jobs in eight of the nine months in 2011 and in 30 of the past 38 months. In all, state and local governments have shed 597,000 jobs since mid-2008, an average of about 15,000 per month. We expect this pace of downsizing in the state and local government sector to persist for the foreseeable future as they struggle to realign costs with revenues.

This week also features a Federal Open Market Committee (FOMC) meeting — accompanied by a press conference and a new economic forecast by Federal Reserve (Fed) Chairman Bernanke, and central bank meetings in Australia, Iceland, and in Europe. The market is expecting a rate cut in Australia, and the European Central Bank (ECB) under the new leadership of Mario Draghi, may also cut rates. The G-20 is set to meet this week, where the details of the European rescue plan are likely to be discussed, and 116 other earnings reports and outlooks from S&P 500 companies are scheduled for this week.

Lowered Expectations Opened the Door for the Economic Data to Beat Expectations

Last week’s batch of data in the United States — which included third quarter gross domestic product (GDP), along with data on housing, consumer spending and sentiment — marked another week in which the economic data in the United States surprised to the upside. How much longer can the data continue this pattern? If the past three years are any guide, we may only have a few more weeks of better-than-expected economic data, as economic expectations continue to move higher.

The Citigroup Economic Surprise Index (CESI) measures whether or not incoming economic data are beating economists’ expectations. There have been three distinct periods since 2008 in which the United States economic data has exceeded expectations, including the current period. The first came as the market first priced in (and then priced out) another Great Depression in late 2008 and early 2009. This episode of better than expected data lasted 23 weeks.

The next wave of better than expected economic data came in late 2010 through early 2011, just after market fears of a European debt crisis-induced double-dip recession pushed economic expectations sharply lower in the spring and summer of 2010. This wave of good news (relative to lowered expectations) began just after Fed Chairman Bernanke hinted at another round of quantitative easing — Fed purchases of Treasuries in the open market — in late August 2010, and lasted until just prior to the Japanese earthquake in mid-March 2011. This episode lasted about 28 weeks.

According to the CESI, the current run of better-than-expected economic data in the United States began in early June 2011, as economic expectations washed out after a post-Japanese earthquake improvement in the United States economic data fizzled and fears of a European debt contagion increased. This prelude was remarkably similar to (and caused by the some of the same fears) as the period just before economic expectations began to rebound in late 2010.

Since early June 2011, more often than not, the United States economic data has surpassed these lowered expectations. But now 19 weeks into this run of better than expected data, we are closing in on the average of the prior two episodes of better-than-expected economic data. Thus, if the past three years are any guide, we may only have another few weeks of better-than-expected economic data, as market participants continue to revise up their economic forecasts, after revising them down while pricing in a recession between the Japanese earthquake in March 2011 and early June 2011.

Our view remains that the United States economy will avoid recession, but that growth is likely to remain tepid, at best, over the next year or so, with the economy growing near its long term growth rate of around 2.0 to 2.5%. This pace of growth would be enough to avoid recession, but not enough to push the unemployment rate meaningfully lower.

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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.

Citigroup Economic Surprise Index (CESI) measures the variation in the gap between the expectations and the real economic data.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The Group of Twenty (G-20) Finance Ministers and Central Bank Governors is the premier forum for our international economic development that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe.

This research material has been prepared by LPL Financial.

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