Monday, February 27, 2012

Weekly Economic Commentary


Unemployment Improving, but Still Uncomfortably High


This week is extraordinarily busy for economic reports and potentially market-moving events in the United States and abroad. On the domestic economic front, the February Institute for Supply Management (ISM) report highlights a week that will also include the release of February vehicle sales data, January personal income and spending, and the second look at the fourth quarter Gross Domestic Product (GDP) data. Fed policy will also vie for attention as the Fed releases its Beige Book and Fed Chairman Bernanke delivers his semiannual monetary policy testimony to Congress.

It is just as busy overseas as Greece, Finland and Germany will vote to approve the latest Greek bailout. In addition, there is a European Union summit late this week, and several European nations (Italy, Germany, Spain and France) will hold bond auctions. The key event of the week will likely be the European Central Bank’s (ECB) offering of an unlimited amount of cheap money for three years to European financial institutions. There are parliamentary elections in Iran, and Iran will likely be in the news over its nuclear program and as long as oil prices stay high and in the headlines. China will release its ISM data for February as well.


Unemployment Rate Putting Pressure on Wage Growth and Spending

·         Any way you slice it, the unemployment rate remains uncomfortably high. We would be more skeptical of the drop in the unemployment rate if other measures of labor market stress (layoff announcements, initial claims for unemployment insurance, job openings) had not moved in the same direction as the unemployment rate. The recent rise in consumer sentiment to four-year highs also helps to corroborate the dip in the unemployment rate.

·         The slow pace of income growth (which takes underemployment into account) and the tepid pace of consumer spending for this stage in the business cycle confirms that the labor market is far from “normal.”

·         The basic methodology used to calculate the unemployment rate (and the other measures of labor market stress) has been in place since 1940.


The nation's unemployment rate dropped from a recent high of 10.0% in October 2009 to 8.3% in January 2012. The next employment report is due out on Friday, March 9. The pre-recession low in the unemployment rate was 4.4%, hit in late 2006 and early 2007. Thus, even after declining steadily for two-and-a-half years, the unemployment rate is still double where it was just prior to the onset of the recession. Broader measures of the stress in the labor market have moved lower recently as well, but also remain at nearly twice the level seen prior to the onset of the recession. For example, a measure of the unemployment rate that takes into account both people who have largely given up looking for work and workers who are able to find only part-time work stood at 15.1% in January 2012, down from the peak of 17.2% hit in late 2009, but still nearly double the rate (7.9%) in late 2006 and early 2007.

A survey of 60,000 households nationwide — an incredibly large sample size for a national survey — generates the data set used to calculate the unemployment rate. (Nationwide polling firms typically poll around 1,000 people for their opinion on presidential races.) The “household survey” has been conducted in much the same way since 1940, and although it has been "modified" over the years, the basic framework of the data set has stayed the same. The last major modification to the data set (and to how the data is collected) came in 1994.

The headline unemployment rate is calculated by dividing the number of unemployed (12.8 million in January 2012) by the number of people in the labor force (154.4 million). The civilian population over the age of 16 stood at 242.3 million in January 2012. You are identified as being part of the labor force if you are over 16, have a job (employed) or don’t have a job (unemployed) but are actively looking for work. You are not in the labor force if you are neither employed nor unemployed — this category includes retired persons, students, those taking care of children or other family members, and others who are neither working nor seeking work.

In January 2012, the labor force was 154.4 million, which consists of 141.6 million employed people and 12.8 million unemployed people. Another 87.9 million people over the age of 16 were classified as not in the labor force.


Stress Measures

We would be more skeptical of the drop in the unemployment rate if other measures of labor market stress (layoff announcements, initial claims for unemployment insurance, job openings, hours worked, etc.) had not moved in the same direction as the unemployment rate.

·         Layoff announcements — collected by a private sector outplacement firm, Challenger, Grey and Christmas — in the 12 months ending in January 2012 totaled 621,000, very close to a 12-year low hit in early 2011. In mid-2009, the 12-month total of announced layoffs was over 1.6 million.

·         Initial claims for unemployment insurance — tallied at the state level — averaged just 359,000 per week in the four weeks ending February 18, 2012, the lowest reading in four years. Claims peaked at nearly 650,000 per week in mid-2009. In mid-February, just under nine million people were receiving some type of unemployment benefit, down from close to 15 million in early 2010.

·         The number of job openings, as measured by the Bureau of Labor Statistics Job Opening and Labor Turnover report, found that in December 2011, there were nearly three million open jobs, up from just under 1.9 million in mid-2009.

·         Virtually every measure of consumer sentiment, all of which are collected by the private sector, is at or close to four-year highs. The improved sentiment is a function of a stronger equity market, less volatility in financial markets, improved labor markets, and until recently, lower gasoline prices.

·         The private sector Gallup polling firm regularly asks 18,000 Americans about their employment status, and the unemployment rate derived from that survey has moved down significantly since the beginning of 2010, tracking the official unemployment rate calculated by the U.S. Department of Labor.

·         However, the Gallup data also suggest that “underemployment” remains quite high, consistent with the government’s measure of “underemployment.”


The high level of underemployment (15.1% reading on the broadest measure of the unemployment rate) can be seen in the tepid gains in personal income derived from wage and salary income, which takes into account unemployment, underemployment and part-time work. By this measure, personal income (derived by adding up all the paychecks earned by all workers throughout the economy) is up by less than 4.0% from a year ago. The weak pace of personal spending (up just 3.9% from a year ago in December 2011) is another sign that while the labor market is healing, consumers are still struggling, especially as we are nearly three years into the economic expansion. Normally, at this point in the business cycle, personal incomes from wages and salaries, as well as personal spending are growing between 5% and 7% per year.







_________________________________________
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.
Stock investing involves risk including loss of principal.
The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).
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 #1-049093 (Exp. 02/13)

Tuesday, February 14, 2012

Weekly Economic Commentary


Trade Offs


With the fourth quarter earnings reporting season wrapping up for corporate America, financial market participants will likely be focused on this week’s full docket of United States economic data and the latest flare-up in the European debt debacle in Greece. European debt markets outside of Greece will likely be in focus this week, as Italy, the Netherlands, France and Spain are slated to hold debt auctions. Central banks in Japan, Chile, and Sweden meet to set rates this week, with Sweden’s Riksbank expected to cut rates for a second time in two months after tightening monetary policy in 2010 and 2011. While the Federal Reserve’s next policy meeting isn’t until mid- March, several Fed officials are scheduled to make public appearances this week, including Fed Chairman Ben Bernanke.


All Eyes on Greece and Full Slate of U.S. Economic Data in the Week Ahead

Greece dominated the headlines last week in the vacuum created by a lack of United States economic data releases and only a scattering of corporate earnings reports for the fourth quarter of 2011. As we prepared this report for publication, the latest flare-up in the European fiscal mess that has dominated the headlines for nearly two years appears to have subsided (for now) after the Greek parliament agreed to another round of severe budget cuts in exchange for another round of loans from the international community led by the International Monetary Fund (IMF), the European Union and the European Central Bank. We continue to expect a mild recession in Europe in 2012 amid ongoing fiscal flare-ups similar to the one witnessed in Greece over the past week or so. This week’s debt auctions in several key European nations will be another test for markets wary of (and perhaps weary of) another debt-related market disruption in Europe.

Looking ahead, Bernanke will deliver his semiannual monetary policy report to Congress on February 29, the same day the Fed will release its Beige Book, a qualitative assessment of economic and banking conditions in each of the 12 Federal Reserve districts (Boston, Kansas City, Philadelphia, etc.) The next FOMC meeting is on March 13. Markets this week will try to reconcile the recent set of stronger than expected economic reports (especially the very robust January employment report) in the United States with the Fed’s aggressively loose monetary policy stance.


Trade Offs and Trade Flows

At his latest press conference (January 25, 2012) Fed Chairman Bernanke answered a question about whether or not the Fed had doubts about the recent run of stronger than expected economic reports in the United States by noting: “...we continue to see headwinds emanating from Europe, coming from the slowing global economy and some other factors as well. So, you know, we are obviously hoping that the strength we saw in the fourth quarter and in recent data will continue into 2012, but we’re going to continue to monitor that situation. I don’t think we’re ready to declare that we’ve entered a new, stronger phase at this point; we’ll continue to look at the data.”

We concur with Fed Chairman Bernanke that Europe remains a risk to the outlook for economic growth in the United States. However, in our view, the risk to the United States economy from Europe is concentrated on the financial side — a collapse of a European financial institution similar to the collapse of Lehman in the fall of 2008, which would likely trigger a freeze of global credit and another sharp contraction in the global economy — rather than on the strictly “economic” side of the ledger via fewer U.S. exports to Europe. The risks of such a collapse have diminished, thanks to bold policy actions by policymakers in late 2011, which included:

·         A commitment to closer fiscal and monetary integration within Europe (The “Grand Plan”) hammered out in October 2011;

·         The introduction of coordinated swap lines by global central banks in late November 2011; and
·         The European Central Bank’s (ECB) offering of an unlimited amount of cash (Long Term Refinancing Operation or LTRO) to financial institutions for three years in late December 2011.


But risks of this sort remain, as markets were reminded last week by the latest drama in Greece. There is still more work to do, as European nations face many monetary, fiscal and political hurdles in 2012. The ECB’s next LTRO is on February 29, and Italy, Spain, France, and the Netherlands issue debt this week. But, should a systemically important European financial institution trigger a global credit crunch, a recession in the United States is quite likely.

However, the mild recession that we expect (and is currently unfolding) in Europe in 2012 may not have as big an impact on the United States economy or on the sales and profits of U.S. corporations as is widely feared. The United States’ trade with Europe is relatively small. In 2011, we shipped just $268 billion worth of goods to Europe, equal to about 2% of the United States’ gross domestic product (GDP). In that same period, the United States shipped more than $700 billion in goods to fast-growing emerging markets, a figure equal to nearly 6% of U.S. GDP. In 2011, 50% of our exports headed to fast-growing emerging markets, while just 15 – 20% of our goods exports head to Europe.

The trade flows between Europe and the emerging markets are also of interest, as market participants weigh the possibility of a “hard landing” in China. What stands out to us is just how enormous the trade of goods is between Europe and emerging markets. The size of these flows may cut both ways however, as investors asses the risks of a slowdown in Europe on the global economy. In 2010 (the latest full year of data available) the emerging market economies shipped $1.4 trillion worth of goods to Europe, an amount that dwarfs the size of the trade flows between the United States and Europe. At the same time, Europe sent $1.1 trillion in goods to fast-growing emerging markets, a figure that represents 60% of Europe’s overall exports. Europe’s ability to send 60% of its exports to fast-growing emerging markets will help to offset some of the weakness in consumer, business and government spending within Europe in 2012.

Of course the slowdown in Europe will crimp demand for emerging market economies’ goods, which will, at the margin, slow growth in that region. But, on balance strong domestic demand for consumer goods, housing and investment, robust government spending in many emerging market economies, decent growth in emerging markets’ “other” major export destination (the United States) and central banks cutting rates should allow emerging markets to easily weather the mild recession in Europe. As in the United States, however, a collapse of a European financial institution and a freeze up of global credit and trade would likely also send many emerging markets on a course towards a “hard landing.”







_____________________________________
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 economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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.
The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).
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 #1-045634 (Exp. 02/13)

Tuesday, February 7, 2012

Weekly Economic Commentary


Job Creation on Track to Sustain Economic Growth


The week after the release of the monthly employment report is typically quiet for economic data and events in the United States, and this week (February 6 – 10) is no exception. There are few, if any, potentially market-moving economic events in the United States this week, and with the fourth quarter corporate earnings season winding down, market participants are likely to be focused on monetary and fiscal policy at home and abroad, along with Chinese economic data for January. In addition, this week’s quiet domestic economic calendar will allow market participants to continue to mull over the January employment report in the United States, which was released on Friday, February 3. On balance, the report was one of the best readings on the United States labor market in years.


Private Sector Jobs Climb, Unemployment Rate Falls

The January employment report was one of the most robust employment reports in many years. The report found that the private sector economy added 257,000 jobs in January (versus expectations of a gain of just 160,000 jobs) and that the unemployment rate dipped another 0.2 percentage points to 8.3%. This result was much better than expected. Far from fluky, the January employment report was solid in nearly every respect, but more importantly, confirms other data on the economy in recently weeks that suggests the pace of the healing in the labor market has been accelerating.

Over the course of 2011 in the Weekly Economic Commentary, we wrote about “the next two million jobs,” after the United States economy had created two million jobs between early 2010 and April 2011 — after shedding nearly nine million jobs in and immediately after the Great Recession (December 2007 – June 2009).

In July 2011, we laid out our base, bull, and bear case scenarios for how quickly the economy would create the next two million jobs. Our base case was that the economy would create “the next two million jobs” by early 2012. The release last week of the United States government’s labor market report for January 2012 provided a good opportunity for us to revisit our forecast. But first, a few housekeeping issues about the employment report, which is subject to a number of revisions that impact the labor market data each year at this time.


Breaking Down the Revisions in January’s Employment Report

Every January, the Bureau of Labor Statistics (BLS) within the United States Department of Labor — the government agency that has been compiling the monthly jobs report for more than six decades — releases revised data on the number of workers on businesses’ payrolls and on the unemployment rate. The January report also incorporates new seasonal factors that slightly changed the month-to-month pattern of job gains and losses over the past several years. The net result of the benchmark revisions and the new seasonal factors was that the economy created 162,000 more jobs than previously thought between March and December 2011.

This upward revision is not unusual, as the revision usually matches to the direction of the overall data. That is, when the economy is weakening, and jobs are being lost, the annual benchmark revision to jobs is typically downward. On the other hand, when the economy is improving, and is generally adding jobs, the benchmark revisions to the data tend to add more jobs. The upward revision to the jobs data based on the new information was the first since 2006, a year in which the economy created a significant number of jobs.


Economy Continues to Track Our Base Case for the “Next Two Million Jobs”

According to the revised data, the private economy created the first two million jobs in this recovery between March 2010 and March 2011. Since then the private sector economy has created an additional 1.7 million jobs, and continues to track our base case for the “next two million jobs” as first detailed in our July 5, 2011 Weekly Economic Commentary. As we noted in that commentary, which was updated on October 10, 2011, how quickly the economy created the next two million jobs would help to determine the health and sustainability of the recovery.

At our last update on the “next two million jobs” topic in October 2011, job creation had stalled amid the growth scare surrounding the global supply chain disruptions resulting from the Japanese earthquake and tsunami in March 2011, the uncertainty surrounding the European fiscal situation throughout the spring, summer and fall of 2011, and the debate in the United States about the debt ceiling and near-term tax and spending outlook in the summer and early fall of 2011. At that time, job creation was tracking at or below our bear case for the “next two million jobs” as first outlined in July 2011. However, since the summer hiring lull (the economy created just 52,000 private sector jobs in August) the economy’s job creation engine has revved back up. On average, the economy has created under 220,000 private sector jobs per month since the beginning of September 2011, as some of the economic uncertainty surrounding the issues noted above retreated.

If sustained in the next several months, the economy will achieve our base case scenario of creating “the next two million jobs” by early 2012, by creating two million jobs between April 2011 and March 2012. A continuation of this pace of private sector job growth would see the economy recoup all the private sector jobs lost during the Great Recession in two years, by January 2014. This type of job growth would likely be accompanied by economic growth at or slightly above our GDP forecast for 2012 of 2.0% growth. This pace of job growth would likely still keep the Fed on hold until the end of 2014/early 2015.

The pace of job creation since early 2010 (when the economy began to regularly create jobs again) is right in line with job creation seen at similar points in the recoveries from the 1990 – 91 and 2001 recessions. However, this pace of job creation pales in comparison to the 5 million and 7 million jobs created at similar points in the robust economic recoveries of the mid-1970s and early-1980s, respectively.

Thus, at around 220,000 private sector jobs per month, the economy continues to track toward modest job gains, a modestly declining unemployment rate, a slightly below average rate of GDP growth, and a Fed that is poised to provide the economy more stimulus. However, if the pace of job growth accelerates to over 300,000 per month on a sustained basis, the Fed would likely hold off on any more moves to ease monetary policy. Alternatively, if job growth slows back to the 100,000 or so per month rate seen during the spring and summer of 2011, the Fed would likely need to remove easy monetary policy measures more quickly than the market now expects.







____________________________________________
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.
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 #1-043628 (Exp. 02/13)