Weekly Economic Commentary

 Unintended Consequences of Low Rates

As is typical in the first week of a new month, this week (January 30 – February 3) is packed with key economic releases in the United States. Employment, manufacturing, consumer spending and consumer confidence will compete with another flare-up of the European fiscal woes and key manufacturing data in China. In addition, a number of Federal Reserve (Fed) officials are scheduled to make public appearances this week, including Fed Chairman Ben Bernanke, who will deliver testimony to the House Budget Committee on Thursday, February 2.

Impact of Energy Prices, Interest Rates and Dividends on Personal Income and Spending

Last week (January 23 – 27) the news that real gross domestic product (GDP) grew at just 2.8% in the fourth quarter of 2011 was a disappointment relative to expectations of a 3.0% gain. Consumer spending, which accounts for more than two-thirds of GDP, was a major contributor to that disappointing result, rising at just 2.0% between the third and fourth quarters of 2011. Market participants were looking for a slightly more robust gain of 2.4%.

The causes of tepid consumer spending in the economic recovery that began in mid-2009 are well documented and include (but are not limited to):

·         Sluggish labor market, underemployment and very modest income growth

·         Large overhang of consumer mortgage and consumer installment debt

·         Increased economic uncertainty leading to increased savings

·         Weak housing market

·         Tighter lending standards for consumer installment and mortgage debt

Consumer Income Growth Improving Modestly, but Employment Picture Needs to Change

Over time, consumer income growth is the best determinate of consumer spending growth. In 2011, personal incomes (which include income from wages and salaries, government transfer payments, rental income and income of small business owners) rose 4.7%, a stronger pace of growth than seen in 2010 (+3.7%), and a complete turnaround from 2009, when personal income fell 4.3%. However, over the past 50 years, personal income growth has averaged 7% per year. During the middle of the last economic recovery (2001 – 2007), personal income growth averaged close to 6%. The subpar growth in personal income in the current recovery relative to history and to prior recoveries is a direct result of the high unemployment rate (8.5% in December 2011) and the high underemployment rate (workers who are working part time, discouraged workers, etc.). Both the unemployment rate and the underemployment rate need to decline further in order to see a higher pace of income (and spending) growth in 2012 and beyond.

Some of the factors weighing on spending have improved in recent quarters, and some of the factors that have restrained incomes have eased as well. Consumers have spent the past three years spending a little, saving a little and paying down debt, reducing the record high debt-to-income levels seen at the worst of the financial crisis. However, debt burdens (as measured by total debt to income) remain high by historical standards. The housing market likely bottomed out nationally in early 2009, and has been recovering (albeit very slowly) since then. This has helped some consumers feel “wealthier,” but in general, the tepid housing market remains a key impediment to consumer spending. Banks’ lending standards for businesses and consumers seeking loans have loosened over the past several years, but it remains difficult for many consumers to borrow at low rates to finance a home or some other type of consumer good.

Lower Energy Prices Putting Dollars in Consumer Wallets

On the spending side, although the rise in consumer energy prices crimped economic growth in the first half of 2011, lower consumer energy prices since their peak in mid-2008 have helped to put more spending power in consumer wallets. In mid-2008, consumers were spending $713 billion per year on consumer energy products. In December 2011, the spend rate was just $621 billion. That is nearly $100 billion in additional spending power for consumers relative to the peak in energy prices in mid-2008. Warmer weather in much of the nation in December 2011 helped to hold down energy costs, and that warm weather extended into January 2012, which should leave some additional dollars in consumers’ pockets in early 2012.

Consumers Are Experiencing Lower Interest Payments and Less Interest Income

However, the big drop in interest rates (engineered by the Fed at the short end of the yield curve and the result of flight to safety, a lack of inflation and sluggish growth at the long end of the curve) cuts both ways. In general, consumers are net recipients of interest income (from savings accounts, certificates of deposit, Treasury notes and bills, etc.). As 2011 ended, consumers were receiving $975 billion in interest income and paying about $685 billion in interest to their creditors (credit cards, banks, mortgages, etc.). Both figures have dropped dramatically since the peak in 2008, when consumers were on the receiving end of over $1.4 trillion in interest income while paying out around $950 billion in interest. Thus, as 2011 ended, consumers were net recipients of around $300 billion in interest payments, down from close to $500 billion in mid-2008.

At his press conference after last week’s Federal Open Market Committee (FOMC) meeting, Fed Chairman Ben Bernanke acknowledged that low interest rates were impacting savers, but pointed out that “savers in our economy are dependent on a healthy economy in order to get adequate returns. In particular, people own stocks and corporate bonds and other securities as well as say, Treasury securities. And if our economy is in really bad shape, then they are not going to get good returns on those investments.”

Comeback of Dividend Payments by Corporations Provides Modest Offset

To Chairman Bernanke’s point, a modest offset to this hit to income for consumers is the comeback of divided payments by corporations since mid- 2008. Dividends paid by corporations to individuals are now almost back to their all-time peak set in early 2008, and have increased by more than $225 billion since their low in mid-2009. Adding dividends to the net interest received, we find that consumers’ net interest income plus dividends at the end of 2012 was $1.1 trillion, about $200 billion lower than at the peak in late 2008.

On balance then, lower rates have hurt consumer incomes and consumer spending, but Fed policies that help to stimulate growth helped companies to achieve and sustain profitability and increase their dividend payments to consumers, providing a slight offset. Lower consumer energy prices have also helped to boost consumers’ disposable incomes slightly, leaving more jobs and more incomes as the key driver of consumer spending in the period 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.

* Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

^ Federal Funds Rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis.

† Private Sector – the total nonfarm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. The nonfarm payroll statistic is reported monthly, on the first Friday of the month, and is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity. It doesn’t include: - general government employees - private household employees - employees of nonprofit organizations that provide assistance to individuals - farm employees

The unemployment rate is the percentage of the total labor force that is unemployed but actively seeking employment and willing to work.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Consumer Price Inflations is the retail price increase as measured by a consumer price index (CPI).

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.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

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 #1-041464 (Exp. 01/13)

Weekly Economic Commentary

State of the Union Preview

President Obama’s State of the Union (SOTU), scheduled for Tuesday, January 24, is unlikely to be a big market mover. In fact, most SOTU speeches see less than a 1% move in the stock market on the following day and the average move is only 0.14%.  However, the themes and philosophy presented may shape the market’s movements in the months to come.

Rather than break new ground, the SOTU address is likely to echo the President’s December 6 speech in Osawatomie, Kansas. That speech was modeled after President Theodore Roosevelt’s 1910 historic address in that city on economic and social equality that led into 20th century progressivism, the central philosophy of Obama’s presidency.

The many topics of the speech — and their market impacts — can be broken down in terms of what will happen, what will not happen, and what could happen in 2012.

What Will Happen

In the SOTU address, Obama is very likely to highlight the immediate need for Congress to come together to extend the payroll tax cut and unemployment insurance benefits through 2012. In December 2011, a bitterly divided Congress could not come together on how to pay for a year-long extension and so only extended them for two months. We expect Congress to further extend these stimulus measures before they expire at the end of February, but the hostile negotiations — something the markets have had a break from in recent weeks — are likely to garner attention and help to renew market volatility after a remarkably stable advance in the first few weeks of the year.

Regulatory policy, an area where the executive branch is less dependent upon Congress’ leadership, will be a key part of the speech. The President is likely to highlight revamped housing programs, such as the Home Affordable Refinance Program (HARP), and announce a settlement that would end long running negotiations among Obama administration officials, state attorneys general and at least five of the nation’s largest financial services companies over “robo-signing” and questionable foreclosure practices. The settlement could be good news for Financials, one of the top performing sectors this year.

What Will Not Happen

The President is likely to call for increased infrastructure investment in the U.S. economy, including school construction, roads and bridges, and high-speed rails. Congress is unlikely to appropriate the funding to meet the President’s call on these items. Companies in the Industrial sector have performed well so far this year, but do not appear to be pricing in increased domestic infrastructure spending.

Job growth is key to the President’s re-election chances. Historically, inflation-adjusted, after-tax income growth of about 3% appears to be the threshold for incumbents to get 50% of the popular vote. Currently, this measure of per capita income is only growing at 0.1%.

While factors other than jobs have a bearing on the election, job creation may be the key measure by which Obama’s presidency will be judged. However, much like infrastructure initiatives, measures to stimulate job growth presented in the SOTU are unlikely to be funded.

The President will likely address eliminating the so-called Bush tax cuts for higher earners, especially those making $1 million or more a year. In addition, given the recent attention to Mitt Romney’s tax filings, the President may call for applying income taxes to carried interest. With the President due to release his budget on February 6, he may also address overseas corporate tax breaks. However, with the House in Republican hands, none of these tax proposals will pass this year.

What Could Happen

This SOTU may foreshadow the President tilting his focus away from domestic politics to foreign affairs over the course of 2012. In doing so, he is shifting from the area where the President is institutionally weak (domestic policies) to the place where the President is institutionally strong (foreign policy). A Congress divided into two houses, a Supreme Court, and the states limit the President dramatically in domestic politics. However, the Constitution and American tradition give the President tremendous power in foreign policy. The President will surely highlight the U.S. withdrawal from Iraq and the winding down of the war in Afghanistan. Another foreign policy matter that may move the oil markets will be his discussion about Iran and the potential impact of U.S., Japanese, and European sanctions on Iranian oil.

Obama’s re-election strategy may be one of opposition to Congress. Essentially, this was Bill Clinton’s strategy in 1996 with a Republican Congress and it worked. Going into opposition against Congress could energize the President’s base, but that base is in the low to mid-40s. By itself, this may not be enough. Instead, over the next 10 months, Obama’s strategy may be to shift from the domestic aspects of the presidency where he is weaker to the stronger part, foreign policy, where a president can generally act decisively without congressional backing.

The critical issue for post-Iraq war foreign policy may be the U.S. relationship with Iran. An often rumored “October” surprise is the idea of attacking Iran’s nuclear facilities. But a precise strike can be messy since it carries the risk of Iranian retaliation in the Strait of Hormuz through which a meaningful percentage of the world’s oil travels. An approach with less chance for global economic disruption is a generalized air campaign against both Iran’s nuclear and military sites. But, in our view, starting a war is a huge risk. Setting aside all other considerations, from a political point of view, it would alienate Obama’s political base, many of whom supported him because he would not undertake the unilateral military moves of his predecessor. This is not intended to imply President Obama would consider starting a war for political ends, but merely to show that even if it were a consideration it is unlikely to be a successful strategy.

However, there is another foreign policy option, one that would appeal both to Obama’s political philosophy and to his political situation: pulling a Nixon. In February 1972, the last year of his first term as he ran for re-election, President Richard Nixon visited China in a grand diplomatic gesture even while Chinese weapons were being used to kill American soldiers in Vietnam. In another interesting parallel that rings with echoes of the themes of Obama’s SOTU address, President Theodore Roosevelt did the same thing with the Soviets in 1941. A diplomatic engagement with Iran would seem to appeal to the President and his political base and rejuvenate some of the energy around a theme that helped him win the election in 2008.

We will be listening to the SOTU for clues as to the President’s foreign policy initiatives. If the President were to pursue this foreign policy choice, it may have the effect of sharply lowering oil prices — and help to stimulate the U.S. economy — as geopolitical risk fades and added supply returns with the potential for a lift of the long-running embargo that has blocked critical parts and equipment needed to ramp up Iranian oil output. While a gesture by no means guarantees a resolution, the markets may welcome news of a potential arrangement with Iran.

__________________________________________

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 economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

International and emerging markets 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 #1-037503 (Exp. 01/13)

Weekly Economic Commentary

Does Economic Momentum Exist?

In June 2011, Federal Reserve (Fed) Chairman Ben Bernanke noted that the economic recovery had been “uneven across sectors and frustratingly slow.” In November 2011, Bernanke said that there “have been some elements of bad luck” impacting the economy. Even before November, however, the recovery had been picking up some steam.

Has the economy’s luck turned, and is some forward momentum happening finally? This week’s rather modest set of data, compared to the deluge of data in the first week of 2012, is unlikely to change the market’s view that the U.S. economy gained some momentum as 2011 ended and 2012 began.

The slate of economic data this week — which includes early January readings on initial claims for unemployment insurance and weekly retail sales, December readings on retail sales and consumer sentiment, and November readings on job openings, business inventories and merchandise trade — will likely continue to show that the economy gathered momentum as 2011 drew to a close. The Fed's Beige Book, a qualitative assessment of banking and business conditions in each of the Fed's 12 regional districts, is also likely to garner significant market attention ahead of the late January Federal Open Market Committee (FOMC) meeting. Overseas, Chinese economic reports for December are due this week and are likely to show that China is headed for a soft landing, not a hard landing, and, more importantly, that Chinese inflation continued to moderate in December, which paves the way for more monetary policy easing in China in the coming weeks.

Economic Momentum Is Rare

The U.S. economy rarely proceeds, either forward or backward, in a straight line, accelerating or decelerating evenly as a car would when its driver is applying steady pressure to the gas pedal or the brakes. Normally, economic growth in the United States from quarter to quarter is a series of uneven fits and starts, acting more like a car with a manual transmission being operated by a teenager just learning how to drive.

Over the last 60 years, the quarter-to-quarter change in gross domestic product (GDP), the most comprehensive measure of the health of the economy, has rarely moved steadily up (or down) for more than a few quarters at most. The last time the economy steadily accelerated for three consecutive quarters was in mid-2004 into early 2005. The last time the economy steadily accelerated over four consecutive quarters was in the mid-1950s!

During the first nine quarters of the current economic expansion (which began in mid-2009), the economy has posted an average annualized growth rate of just 2.4%. This pace of growth trails the average growth rate experienced over similar time periods after the mild 1990 – 91 and 2001 recessions (2.8%), and is well below the average growth rate (5.7%) seen in the nine quarters after the severe 1973 – 75 and 1981 – 82 recessions.

However, over the first three quarters of 2011, the economy actually accelerated in a straight line, with growth in the first quarter increasing at a 0.4% annualized rate, 1.3% in the second quarter, and 1.8% in the third quarter. Our view is that the straight-line acceleration will continue into the recently completed fourth quarter of 2011, with real GDP rising at a 3.0 to 3.5% pace versus the third quarter. The third quarter GDP data is due out in late January, although financial markets have probably already discounted the acceleration in economic growth in the fourth quarter. Market participants are now more concerned with growth prospects in the current first quarter of 2012, and, to a larger extent, growth prospects for all of 2012.

The longer-term growth rate (or speed limit) for the U.S. economy is regulated by the growth in the labor force plus the output per worker (productivity). The Great Recession and its aftermath had noticeable impacts on both the growth in the labor force and productivity. However, the Fed (and other market participants) estimate the U.S. economy’s longer-term speed limit as being around 2.5 to 3.0%. Often, the economy is subject to temporary factors (natural disasters, unusual weather, supply chain disruptions, worker strikes, geopolitical events, etc.) that depress growth for a quarter or two, and the economy grows at a pace below its long-term potential. Once those factors fade, the economy oftentimes plays “catch up”, and growth can accelerate for a quarter or two, and grows above its long-term potential growth rate.

Recently, most of the fits and starts impacting the economy have depressed, rather than boosted, economic growth. From the fourth quarter of 2009 through the second quarter of 2010, the economy grew at 3.8%, 3.9%, and 3.8% as growth accelerated from the end of the Great Recession in the second quarter of 2009. However, the first flare-up of the European fiscal crisis in the spring and summer of 2010 (Greece, Portugal and Ireland) acted to depress growth, and later in the year and into 2011, rising consumer energy prices (largely the result of political turmoil in the Middle East) also pressured growth. By mid-2011, the European fiscal crisis broadened out, the dysfunction in Washington surrounding the U.S. fiscal situation negatively impacted both business and consumer sentiment, and the earthquake in Japan in March 2011, along with the long lasting disruptions to the global supply chain, slowed growth to nearly stall speed. An unusually snowy early 2011, together with record flooding and tornadoes in the U.S., also hampered growth in early 2011.

Momentum Turned in Late 2011

As 2011 turned into 2012, however, many, but by no means all, of these temporary factors that depressed growth between mid-2010 and mid-2011 were fading and beginning to reverse course, which appeared to provide the economy with some momentum:

·         The global supply chain disruptions due to the earthquake in Japan had largely run their course, although massive flooding in Thailand in mid-to-late 2011 has already begun adversely impacting output of some key components in the technology area.

·         Consumer energy prices moved sharply lower over the second half of 2011, and declines in food prices have also helped to cool consumer inflation.

·         The fiscal and legislative concerns surrounding the debt ceiling, our nation’s credit rating, and the extension of payroll tax cuts and unemployment insurance benefits appear to have waned for now. In general, the market and economy-driving political battles that hampered growth in 2011 are unlikely to be repeated in 2012, although they simmer just below the surface.

·         While the uncertainty surrounding the European fiscal situation remains a concern for consumers and businesses, our view is that recent policy actions by European politicians and the European Central Bank (ECB) have taken the worst case scenario off the table for now.

Looking ahead, warmer-than-usual weather, monetary policy easing in China, strong auto production schedules for the first quarter, the recent drop in initial claims for unemployment insurance, the surge in consumer sentiment, and the solid December jobs report (released on Friday, January 6) all suggest that “economic momentum” will persist into the first quarter of 2012. However, with several sectors of the economy still struggling (housing, state and local government, construction of office parks, malls and factories), another round of economic speed bumps could very easily slow the economy’s hard won momentum as 2012 progresses.

_________________________________________

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.

Credit rating is an assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.

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 #1-035765 (Exp. 01/13)

Weekly Economic Commentary

Hitting the Ground Running

Financial markets absorbed a lot of bad news in 2011, but will have to set those memories aside quickly here in the New Year, and be ready to focus on another key round of economic data and policy events. Key reports on the state of the manufacturing sector, consumer spending and the labor market as 2011 ended will compete for attention with the minutes of the December 13 Federal Open Market Committee (FOMC) meeting.

As noted in our final Weekly Economic Commentary of 2011, “Bucking the Trend” (December 19, 2011), 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 December was the strongest since early 2008, and orders for durable goods surged by 3.8% month-over-month in November, indicating that the manufacturing sector had enough momentum to carry it into early 2012.

As this report was being prepared for publication, the Institute of Supply Management (ISM) released its report on manufacturing for December. The market is looking for another modest acceleration in manufacturing activity in December. The ISM (a reading above 50 on this index means that the manufacturing sector is expanding while a reading below 50 indicates that the manufacturing sector is contracting; a reading at or below 42 indicates a recession) decelerated sharply from readings over 60 in early 2011 to just 50.6 in August, as the domestic manufacturing sector experienced the full brunt of the global supply chain disruptions. Since then, the ISM has moved steadily higher as the global supply chain recovered.

However, the likely recession in Europe along with slower growth in China and other emerging markets may halt the improvement in the manufacturing sector in early 2012. Our view is that the turmoil in Europe and the slowdown in China have probably already had an impact on manufacturing in the United States, though manufacturing has been stronger than the consensus forecast just a few months ago.

The consumer will also be in the spotlight this week, as retailers report their December sales and automakers report their tally of December auto and light truck sales. In recent weeks, consumer sentiment has recovered nearly all the ground lost during, and just after, the wrenching debate in Washington over the debt ceiling in July and August 2011. Lower gasoline and grocery prices as well as some better news on housing helped to lift sentiment, but sentiment continued to be weighed down by horrible news in Europe, the late December 2011 wrangling in Washington over the extension of the payroll tax cuts, and extreme volatility in the financial markets.

In mid-December, 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.

As noted in our Weekly Economic Commentary from December 19, in the past, the National Retail Federation has been very conservative in its holiday sales forecasts. Thus, the positive guidance provided by the NRF 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.

The key report of the week is likely to be the December employment report, due out on Friday, January 6. Underlying improvement in the labor market in recent months has helped to drive the number of Americans filing initial claims for unemployment insurance to three-and-a-half-year lows and has also probably helped to boost consumer sentiment as well. The December employment report will provide a comprehensive look at the labor market in the month.

Our view is that the labor market is stuck in neutral, but recent data suggests it may be moving into gear, as some of the economic, policy and regulatory uncertainty that restrained hiring in the middle part of 2011 is beginning to lift. This is by no means an “all clear” on the labor market, as the private sector economy shed more than 8.8 million jobs between the end of 2007 and early 2010, and has added just under 3 million back since then. A steadier pace of economic growth coupled with ongoing reduction in the economic, policy and regulatory uncertainty that weighed on hiring 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 tick up to 8.7% in December after falling a stunning 0.4% between October and November to 8.6%. The dip in the rate, which was widely questioned at the time, now seems more reasonable given the data we now have on initial claims, consumer sentiment and consumer spending for November and December. 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). 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 160,000 private sector jobs in December, a slight acceleration from the 140,000 private sector jobs created in November. From January through November 2011, the economy created an average of 156,000 private sector jobs per month, which 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% in 2011. While the private sector is expected to have added about 160,000 jobs in December, the public sector (federal, state, and local governments) is expected to see another drop in jobs. In particular, the state and local government sector shed jobs in ten of the first eleven months of 2011 and in 32 of the past 40 months. In all, state and local governments have shed 610,000 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 state and local governments struggle to realign costs with revenues. We expect that 2012 will be another year in which the state and local government sector provides little support for the overall economy.

Communication Clarification from the Fed?

As this report was being prepared for publication, the Federal Reserve (Fed) will release the minutes of its December 13 FOMC meeting. The December 13 FOMC meeting itself was a non-event, as the Fed made very few changes to the statement it released after the meeting, reiterated its promise to keep rates at extraordinarily low levels until at least mid-2013, and maintained its program of extending the maturity of its Treasury holdings to keep yields low in order to encourage more borrowing by households, homebuyers, and businesses (dubbed “Operation Twist”, set to end in mid-2012).

Between now and then, Fed policymakers must grapple with the European financial crisis and its impact on the global and U.S. economies. As the Fed continues to monitor its view of the economy — which is more optimistic than our view, the consensus view, the market’s view and the financial media’s view — one of the tools it can employ is its communications policy. Market participants are hoping to learn more about how the Fed intends to alter the way it communicates with the public, the markets and its bosses in Congress from the minutes of the December 13 meeting.

However, given that the December 13 meeting was just a one-day meeting — four of the Fed’s eight meetings a year are two-day affairs at which policymakers craft a new economic forecast — the Fed was unlikely to have agreed to employ any of its new “tools” at that meeting, but it more than likely discussed the options on the table ahead of the two-day FOMC meeting at the end of this month. In our view, those tools would include enhancing the way the Fed communicates with the public, and, if warranted, yet another round of fixed income security purchases in the open market, also known as quantitative easing, round three (QE3). While the economic hurdle of implementing QE3 may be low, the political hurdles both within and outside the Fed remain high, which leaves only the Fed’s communication policies as a viable alternative in the near term.

As we noted in a recent Weekly Economic Commentary, while more timely communication from the Fed is one possibility, the minutes of recent FOMC meetings (prior to the December 13 meeting) suggest that Fed policymakers are leaning toward providing more clarity on their views of inflation, economic growth, their balance sheet (Operation Twist, QE3, etc.) and even interest rates. Some members of the FOMC have even hinted that having the Fed target a level of gross domestic product (GDP) or inflation may be appropriate ways to communicate with the public and financial markets (and its bosses in Congress, too!). Thus, we expect the communications issue was a key topic of discussion at the December 13 FOMC meeting, and the minutes of that meeting will likely pave the way for some action to be taken on the communications front at the two-day FOMC meeting in late January 2012.

_____________________________________________

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.

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.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

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.

The University of Michigan Consumer Sentiment Index (MCSI) is a survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

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 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 #1-033445 (Exp. 01/13)