Weekly Economic Commentary

The Long Road Home

This week brings a mix of policy and data, but the Supreme Court's consideration of the Affordable Care Act will likely draw most of the media's attention. This week's U.S. economic data is a mix of data on: 1) manufacturing in February (durable goods orders) and March (Richmond, Kansas City and Dallas Fed manufacturing indices along with the Chicago area Purchasing Managers Index-PMI); 2) housing (pending home sales in February); 3) and consumer sentiment for March. Markets will be looking for signs of slowdown in the United States after seeing the weaker data in Europe, the U.K. and China last week. The release of the German IFO index for March and the March PMI in China are the data highlights overseas. The real action, however, may be on the policy front this week, at home and abroad.

The U.S. Supreme Court will hear arguments this week on the Affordable Care Act. The hearings will get a lot of media attention, though a decision by the Supreme Court is not due until the end of June. While the Federal Reserve’s (Fed) next Federal Open Market Committee (FOMC) meeting is still five weeks away, the debate over whether or not the Fed will conduct another round of quantitative easing (QE3) will be in the news this week, as no fewer than 10 Fed officials make public appearances. There are more policy hawks (those favoring the low inflation side of the Fed’s dual mandate) than doves (those who favor the full employment side) on the docket, and so by the end of the week, the market may doubt that QE3 is still on the table. Our view remains that unless the economy accelerates noticeably in the next several months, the Fed is more likely than not to do another round of quantitative easing in the second half of the year. In addition to the Fed speakers, there are several key finance ministers’ meetings (and debt auctions) in Europe this week, and leaders of the BRIC nations (Brazil, Russia, India, China) will meet in India amid slowing growth in many emerging market economies.

Still on the Road to Recovery

Housing was in the news last week, and there are several housing-related reports due out this week as well. As we have noted in recent commentaries, the U.S. housing market is still in the process of recovering from the 2006 – 09 bust that followed the housing boom that began to show severe cracks in 2007 and collapsed in 2008. The collapse in housing, in turn, was a major contributor to the financial crisis and Great Recession of 2007 – 09. The housing market, along with many financial markets, and many economies around the globe are still feeling the after-effects of the housing collapse.

As the old saying goes, the real estate market is all about “location, location, location.” When we discuss the housing market, we do so from a national perspective: what is happening to the housing market on your street or in your neighborhood, town, city or state may be completely different (better or worse) than what is happening nationwide.

With that important caveat in mind, we can say that the housing market (sales, prices, construction, etc.) hit bottom in early 2009 and has been moving sideways to slightly higher since then. Housing construction (which is the most direct way housing impacts gross domestic product–GDP) has not been a significant, sustained contributor to economic growth (as measured by GDP) since 2005. The lack of participation from housing has been one of the main reasons (along with the severe cutbacks in state and local governments) behind the so far sluggish economic recovery. Looking ahead to the remainder of 2012, we see only a modest contribution to GDP growth from housing, as the positives slightly outweigh the negatives.

There are a number of direct (housing starts, housing sales, construction spending, home prices) and indirect (homebuilder sentiment, mortgage applications, foreclosures, inventories of unsold homes, mortgage rates, housing vacancies, lumber prices, prices of publicly traded homebuilders) ways to measure the health of the housing market. These data are collected and disseminated by both the U.S. government and by private sources. A quick recap of these various indicators is below.

Taking the Pulse

·        Near-record housing affordability. Housing affordability, the ability of a household with the median income to afford the payments on a median priced house at prevailing mortgage rates, is at an all-time high. Rising incomes, record-low mortgage rates, and the aftermath of the 20 – 30% drop in home prices nationwide account for the record level of affordability.

·        Homebuilder sentiment. At 28 (on a scale of 0 to 100, where zero is the worst and 100 is the best) the index of homebuilder sentiment has surged over the past nine months and now sits at a four-and-a-half-year high albeit still at a very low level. The homebuilder sentiment data is compiled by the private sector’s National Association of Home Builders.

·        Inventories of unsold homes are low. Despite a “shadow inventory”, homes in or close to foreclosures and homes still sitting on bank balance sheets, inventories of unsold existing homes are the lowest they have been since 2006 – 07. The official count of the inventory of unsold single family existing homes (from the National Association of Realtors) tells us that 2.1 million existing homes are for sale. Depending on the data source (there is no “official” number for shadow inventory) cited, the shadow inventory is in the range of 1.5 – 2.0 million. While still well above average, the shadow inventory has come down over the past few years as well. It may rise later this year as foreclosures ramp up again after the moratorium was lifted earlier this year.

·        Housing starts and building permits. Responding to less demand for housing, difficult credit conditions and a glut of unsold inventory, homebuilders drastically cut the number of new housing starts in recent years. Housing starts peaked at 2.4 million units in early 2006 and by early 2009 had dropped to under 500,000 units, an 80% drop. Since then, as inventories of unsold new and existing homes shrunk and the economy and financing conditions improved, starts have moved 50% higher. Despite the 50% move off the bottom, housing starts remain 70% below their all-time high. Both housing starts and building permits (a key leading indicator of starts) are collected by the U.S. Commerce Department.

·        Homebuilder stocks. Although they are not a perfect leading indicator of the health of the housing market, the S&P 500 Homebuilders Index has rallied by nearly 80% since October 2011. Despite that dramatic rally, homebuilding stocks are still 75% below the peak hit in mid-2005.

·        Lumber prices. Lumber is a key input to the homebuilding process. Lumber prices peaked in mid-2004 — a year or so before the housing market peaked — and declined by nearly 70% by early 2009. Since early 2009, lumber prices have increased (in fits and starts) by 75%, but remain more than 40% below their 2004 peak. Lumber prices are set in the open market, trading on several global commodity exchanges.

·        Supply and demand for housing credit, bank lending to consumers for mortgages. From the mid-1990s through late 2006, bank lending standards (down payment required, credit scores, work history, etc.) for residential mortgages were relatively easy. Coupled with low rates and rapid innovation in financial products backing residential mortgages, this easy credit helped to fuel the housing boom. The banking industry began tightening lending standards in early 2007, and continued to tighten for more than two years. Lending standards eased in 2009 and 2010, and have only recently returned to where they were in 2003. On the demand side of the equation, consumer demand for mortgages remains muted, as consumers are uncertain about prospects for home price appreciation and their own financial and labor market status in the years ahead. This data is compiled by the Federal Reserve in the Senior Loan Officer Survey, which is released quarterly.

·        Mortgage applications. Measured by the private sector’s Mortgage Bankers Association, the volume of mortgage applications has increased fourfold since late 2008, but remains well below its mid-2000s peak. Weekly mortgage applications are a key gauge of consumer demand for housing, and as we enter the key spring selling season — 40% of home sales occur between April and July — weekly mortgage applications will be a key metric to watch. Mortgage applications are a component of our weekly Current Conditions Index.

·        Foreclosure activity. After a de facto moratorium on new foreclosures was put into place in late 2010 as the United States and individual state governments sued mortgage processors and banks, the pace of new foreclosures slowed down. By early 2012, new foreclosures were at the lowest level since mid-2007. Now that the legal action has been settled,  there is a concern that the foreclosure pipeline will fill back up again. While we may see some spike higher in foreclosures and sales of foreclosed-on bank-owned properties in the coming months, it is important to note that the pipeline of new defaults and overall mortgage delinquencies are falling, aided by a better economy and job market. There are various public and private sources for foreclosure and delinquency data. On the private sector side, firms like RealtyTrak, Lender Processing Services and the Mortgage Bankers Association provide data. Freddie Mac, Fannie Mae, and the Federal Housing Finance Administration (FHFA) are among the government agencies that compile data on delinquencies and foreclosures.

·        Construction employment. As measured by the U.S. Department of Labor, construction employment increased by more than one million between the early 2000s and 2006 to nearly 3.5 million workers. Since then, workers employed in the construction of new homes has dropped by nearly 50%, bottoming out at just under 2 million in late 2010. Since then, construction employment has held steady, but has yet to make a decisive turn higher.

·        Construction already put into place. The value of new residential construction put into place peaked at $535 billion in early 2006. Since then, construction of new homes has plummeted, and by mid-2009, just $122 billion in new home construction was underway. This data series moved sideways for about 18 months, hitting another low ($120 billion) in late 2010. Since then, there has been a modest uptick in construction of new homes, but new home construction is still running 75% below its peak. This data is collected by the U.S. Commerce Department.

·        Home prices. There are a variety of sources for home prices from both the private sector — Case Shiller Home Price Index, CoreLogic, Zillow, RadarLogic, National Association of Realtors — and the U.S. Government — Freddie Mac, Fannie Mae, Federal Housing Finance Agency, etc. In general, these indices all suggest that home prices fell by between 20% and 30% between mid-2005 and early 2009, and are at best unchanged since then. Price changes before, during and after the bubble vary widely by region, price of home and type of property (single family versus condo, distressed and non-distressed, etc.).

·        Demand for housing. New household formation is running just under 1% per year. Contrast that against the 80% drop in new housing starts over the past five years. The gap between new household formation and new housing starts had never been wider, leading some analysts to suggest that we are quickly running out of houses. But, with so many vacant homes (18 million or so), and young people (and older relatives) living with other relatives, it is difficult to say just how quickly we will run out of housing. The U.S. Census Bureau collects the data on household formation and the housing vacancy data.

On balance, the housing market continues to struggle three years after hitting rock bottom, and in some cases seven years after it peaked. How quickly housing can recover from here will help to determine the pace of the overall economic recovery. Warmer and drier than usual weather this winter may help to explain some of the better housing data of late. Warmer weather generally means better housing data (sales, construction, showroom traffic, etc.), so it may be that the better tone to the housing market is purely a function of the weather. We need to see some more normal weather and get past the traditional spring selling season to be sure. Our best bet is that the slow recovery in housing will pick up some steam in 2012, but that it will still take several more years before the national housing market is back to normal.

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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 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.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. The action has subsequently been reexamined in isolation and found to have been more effective than originally thought. As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.

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).

The Chicago Area Purchasing Manager Index that is read on a monthly basis to gauge how manufacturing activity is performing. This index is a true snapshot of how manufacturing and corresponding businesses are performing for a given month. A reading of 50 or above is considered a positive reading. Anything below 50 is considered to indicate a decline in activity. Readings of the index have the ability to shift the day's trading session one way or another based on the results.

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 #1-056167 (Exp. 03/13)

Weekly Economic Commentary

To QE or not to QE?

The Federal Reserve’s (Fed’s) policymaking arm, the Federal Open Market Committee (FOMC) highlights this week’s relative busy mid-month economic and policy calendar. We take a closer look at Fed policy in this week’s publication. Elsewhere, after larger-than-expected rate cuts last week by central banks in Brazil and India, rate setting meetings are scheduled this week in Mexico, Norway, Switzerland and Japan. This week’s economic calendar includes U.S. reports on manufacturing (Philly Fed and Empire State) for March, industrial production in February, and consumer and producer prices in February. Rising gasoline prices will grab the headlines in these reports. Markets will continue to digest last week’s economic reports for February in China, as well as a full docket of European economic reports for January and February. Japan will likely be in the news this week as the one-year anniversary of the earthquake, tsunami and nuclear disaster is recalled. There are several bond auctions in Europe this week, and European finance ministers will meet to discuss the €14.5 bond maturity Greece faces on March 20.

Will the Next Round of QE Be “Sterilized?”

Operation Twist — an effort by the Federal Reserve (Fed) to keep 10-year Treasury yields low by selling its short-term Treasury holdings and purchasing longer-term Treasuries in the open market — is set to end at the end of June 2012. Markets are now sizing up the likelihood of another round of monetary stimulus from the Fed, following quantitative easing 1 (QE1) (2008 – 2010), QE2 (2010 – 2011), and Operation Twist (2011 – 2012). Quantitative easing refers to large-scale bond purchases, consisting of Treasury or agency mortgage-backed securities (or both) by the Fed in the open market.

Our view is that another round of stimulus from the Fed, in whatever form it takes, is data dependent. We also think political hurdles — both inside the Fed and among the Fed’s bosses in Congress — have been the largest impediment to another dose of quantitative easing. Events last week (March 5 – 9) suggest that the Fed may have found a way to lower those political hurdles a bit.

In short, if we see robust economic growth (3 – 4%) between now and the end of June 2012, we would expect the Fed to hold off on another round of quantitative easing (QE). But the current pace of growth (2%) or slower growth would likely lead to another dose of stimulus.

Federal Reserve officials hinted in a well-placed and well-timed Wall Street Journal article last week that the next round of QE would be “sterilized.” This means that the Fed would immediately borrow back some of the cash it injects into the financial system as it purchases the securities in the open market. The Fed hopes to address one of the main political hurdles to another round of QE: the long-held fear that more monetary stimulus would trigger a surge in commodity prices and inflation. (We note that the WSJ article was published just a week before the upcoming March 13 Federal Open Market Committee [FOMC] meeting).

Politics Plays an Even Bigger Role in Policy in a Presidential Election Year

For many in the political class in Washington (and for the public at large), sterilized QE would not be regarded as inflationary, and the Fed would face less of a public relations battle should it decide to pursue that course of action. Of course, politics is nearly unavoidable in Washington, DC in any year. But in a presidential election year, politics often plays an even bigger role in policy — even when it comes to the Fed, which has been viewed in recent years (last 30) as a nonpolitical and independent organization.

For the record, the Fed has either raised or lowered (and in some cases both in the same year!) its short-term policy rate in every single presidential election year starting in 1968. In general, the Fed wants to avoid mingling in politics during an election year, and it may prefer to hold off on changing rates in the months just prior to the election in November. But when push came to shove over the past 40-plus years, the Fed acted to change policy as conditions warranted and is likely to do so again this year if conditions warrant.

Breaking Down the Fed’s Menu of Options

The Fed has two more FOMC meetings (this Tuesday, March 13 and the two-day meeting at the end of April) to discuss another round of stimulus before Operation Twist ends at the end of June. As it is only a one-day meeting, a decision is unlikely to be made at this week’s FOMC meeting. But if history is any guide a discussion of the full range of options open to the Fed is likely at this week’s meeting. The market will get a scrubbed version of the minutes of this week’s FOMC meeting in three weeks’ time, on April 3.

As it stands now: 1) doing nothing; 2) extending Operation Twist or embarking on QE3, but sterilizing the purchases; 3) or doing a non-sterilized version of QE3 seem to be on the menu of options. Last week’s WSJ article suggests that if the Fed does decide that the economy needs more QE, it will likely pursue sterilized QE.

By allowing Operation Twist to expire at the end of June, the Fed would probably be signaling that it is comfortable with a steady climb higher in longer dated Treasury yields, which in turn would push borrowing rates for consumers and businesses higher. We have noted in other LPL Financial Research publications that Operation Twist has been quite successful. We have highlighted that it is one of the key reasons why the 10-year note yield has remained near 2% in the past six months, despite less volatility in Europe, firmer U.S. economic activity and sizable gains in the U.S. equity markets.

Extending Operation Twist would help to keep the 10-year note yield (and likely consumer and business loan rates) lower than otherwise. However, there are some technical impediments, as the Fed (and Treasury) is running low on short dated debt to sell in order to fund purchases of longer dated Treasuries.

That leaves QE3 sterilized and QE3 non-sterilized as options. In either case, the Fed has hinted in recent months that the mortgage market would be a bigger target for QE3 than it was in QE2 (no MBS purchases) or in QE1 when the Fed bought both MBS and Treasuries in the open market.

Risks and Rewards of QE3 Are Being Carefully Considered

Questions remain (inside and outside the Fed) about the efficacy of doing another round of QE. Fed Chairman Ben Bernanke has made it clear that the FOMC carefully weighs the risk against the benefits of doing more QE. The risk/reward trade-off may be even less clear-cut when weighing sterilized QE3. Past examples of sterilized QE (Japan or Europe) have had mixed results at best. The Fed borrowing to buy safe assets from the private sector encourages private investors to take on more risk (which could potentially help the economy). The degree of market impact is potentially greater than with Operation Twist. Unlike with Operation Twist, sterilized QE doesn’t change the mix of assets already on the Fed’s balance sheet. It adds the new assets the Fed is purchasing, and the borrowing to fund those purchases gets added as liabilities. So the impact on the assets is the same as in an unsterilized QE.

Will the Fed do it? We believe the odds strongly favor a sterilized QE. A few months of weaker economic data would get the Fed there, since the economy will likely come in below Fed expectations (FOMC sees 2.5% GDP this year and 3.0% next year), and making it "sterilized" eases a political hurdle about future inflationary consequences. With oil prices high and economic data softening around the world, a modest dip in the data could prompt action.

___________________________________________

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.

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

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. The action has subsequently been reexamined in isolation and found to have been more effective than originally thought. As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.

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).

Treasuries: A marketable, fixed-interest U.S. government debt security. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.

London Interbank Offered Rate (LIBOR): An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.

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 #1-052753 (Exp. 03/13)

Weekly Economic Commentary

Just Warming Up

The February employment report and the economic data for February in China are the highlights on this week’s economic and policy calendar. In addition, the February data on ADP employment, layoff announcements, and merchandise trade for January are due out in the United States. The week will likely be quiet for the Fed, as Fed officials observe the unofficial "quiet period" ahead of the next Federal Open Market Committee (FOMC) meeting on March 13. However, central banks outside the United States will be busy this week, with rate setting meetings in Brazil, Australia, New Zealand, Russia, South Korea, the Eurozone, the UK, Peru, Canada, Poland, Indonesia, and Malaysia. Of these, only Brazil is expected to cut rates. The rest of these central banks are on hold, for now. There are bond auctions in Austria, the Netherlands, Germany and Belgium, as investors await the March 8 deadline to swap out existing Greek debt for newly issued debt as part of the latest bailout.

The Chinese authorities will begin to release China's economic data for February later this week, with the key report being the Consumer Price Index (CPI) report. A deceleration in the CPI in February could pave the way for the China central bank to continue to ease monetary policy in the coming weeks and months. All of the Chinese economic reports for February will be impacted by the shift in the Lunar New Year to January this year versus February in 2011.

Warm Weather Impacting Economic Activity in Early 2012

On balance, the vast majority of the economic data in the United States released since early October 2011 has exceeded expectations. This trend reflects underlying improvement in the overall economy due to:

·         Less uncertainty surrounding the debt issues in Europe

·         A little less rancor (and a little more cooperation) out of Washington compared to this past summer

·         The improving job market as companies have reached the limit on productivity gains

·         A rebound in global economic activity following the global supply chain disruptions that resulted from the Japanese earthquake and tsunami in March 2011.

At least some of the improvement in the economic backdrop may be associated with the weather, which has been warmer and drier than usual since last autumn. In general, warmer (and drier) than normal weather tends to boost economic activity. We saw evidence of these trends in the details of the Federal Reserve’s (Fed) latest Beige Book — a qualitative assessment of business and banking conditions compiled via contacts in the private sector in each Fed district. On balance, the Beige Book was relatively upbeat, with all 12 districts reporting expanding (albeit modest) growth and improving conditions in the labor market, bank lending and credit conditions, and in residential and commercial real estate.

The Beige Book noted that the economic uncertainty that was pervasive in the economy in the summer and fall of 2011 continued to fade, as the word “uncertainty” was used just nine times, down from 33 mentions in the September 2011 Beige Book as, worries over the future of Europe and a greater-than-usual amount of discord in Washington dominated the headlines. There was just one mention of Thailand (and none of Japan), and just 14 mentions of Europe in this Beige Book, versus 16 in the January 2012 Beige Book. However the word “weather” appeared 29 times in the latest Beige Book, and the phrase “warm weather” appeared 12 times. In the January 2012 version of the Beige Book, the word weather appeared 13 times, with the phrase “warm weather” appearing just seven times.

It is not unusual for a Beige Book released in March of any year to cite weather as a factor impacting some aspect of economic activity around the nation, but it is unusual to see warm weather mentioned so often. For example, in the Beige Book released one year ago (in March 2011) the word weather was mentioned 36 times as the nation suffered through a very cold and snowy winter season. The word warm appeared just twice the March 2011 Beige Book. A year earlier, in the March 2010 edition of the Beige Book, the word weather appeared 41 times, but the word warm appeared just twice.

Thus, at least some of the improvement in the economic backdrop since last fall has likely been weather-related, although it is difficult to pinpoint exactly how much. Weather often has a bigger impact when there is a big change in pattern from a long stretch of colder and wetter-than-usual weather to warmer and drier weather. For the most part, since the harsh winter of 2010 – 2011 ended, 2011 was relatively warmer and drier than usual.

Still, the October 2011 through February 2012 period has been warmer than usual, with January 2012 being the fourth warmest January since 1921. This period has also been drier than usual, with the exception of November 2011. Taken together, these trends have added to economic activity. We again turn to the Beige Book for details.

Looking at the detail from Beige Books during recent warmer-than-usual winters (1997 – 98, 1998 – 99, 1999 – 2000, 2005 – 2006), we find that all else equal, the warm (and dry) temperatures will boost:

·         Overall consumer spending as consumers spend less on heating their homes

·         Construction activity (houses, office parks, high ways, public work projects, etc.)

·         Home sales

·         Apartment leasing activity

·         Mortgage originations

·         Auto sales

·         Non-clothing retail sales (hardware stores, gardening centers, sporting goods)

·         Energy and mining activity

·         Tourism (beach and golf)

·         Agriculture

·         Restaurants

·         Overall employment in the areas listed above, lowering initial jobless claims

·         On the other hand, warmer-than-usual weather this time of the year can:

·         Hurt sales of winter clothing and winter sports gear

·         Dampen output of natural gas and oil as consumers and businesses use less heat

·         Put a crimp in demand for hotel rooms and services around ski areas and other areas that cater to winter recreational activities

·         Hurt demand for feed supplies for livestock

On the price side, warmer-than-usual weather at this time of year can also increase the supply (and perhaps lower the cost) of fruits, vegetables, plants, and flowers. These products are also at risk of a late frost, which could reduce supply and cause rising prices later in the spring. Warmer weather can mean lower feed costs for dairy, cattle, and hog producers. Inventories can be altered as well, as too much winter clothing piles up on stores’ shelves, but not enough lumber or building materials are produced, leaving inventories lower than they would normally be.

Although warm weather this time of the year does not impact every area of the economy or even every area of the country, generally, the warmer weather can “pull forward” some purchases (like sporting goods, gardening supplies, spring clothing, and even autos and houses). These purchases may inflate the economic data in January, February, and March and depress activity in the spring if the weather returns to normal.

So here in March, we get reports mainly for February, which should be stronger than otherwise due to weather. Note that for retailers, March will likely be much stronger this year versus last year due to the earlier Easter holiday (April 8 versus April 24). March data gets reported in April. But looking further out into the year, if we have a return to “normal weather,” the data reported in April and May for March and April could look weak and cause markets to get concerned about another double-dip scare.

_____________________________________

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.

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

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.

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 #1-050823 (Exp. 03/13)