Weekly Economic Commentary

Most Asked Fed Question May Go Unanswered

This week marks the first anniversary of the latest round of increased transparency by the Federal Reserve (Fed) as Fed Chairman Ben Bernanke will kick off a second year of post-Federal Open Market Committee (FOMC) meeting press conferences on Wednesday, April 25. Bernanke’s first post- FOMC press conference was held on April 27, 2011. Bernanke also held press conferences after the FOMC meetings that ended on June 22, 2011, November 2, 2011, and January 25, 2012. While the media is likely to put most of the focus on Bernanke’s press conference and on the statement released after the FOMC meeting, market participants will likely be primarily focused on the FOMC’s latest forecast of the economy and the path of interest rates and how those forecasts compare to the FOMC’s judgment of “normal” or trend growth in the economy. By the end of the week, the market would like to be able to more clearly assess the odds of more monetary stimulus from the FOMC when the current round of stimulus — Operation Twist — ends at the end of June 2012. In our view, despite all the information flowing from the Fed this week, that question might go largely unanswered, leaving the timing of or the decision to implement another round of easing up to the flow of economic data and events over the next few months.

Fed Issues

The issues at hand for Chairman Bernanke at the conclusion of the meeting include deciding on the fate of Operation Twist, or as it is officially called the Maturity Extension Program, which ends on June 30, 2012. Operation Twist was hinted at by Bernanke in August 2011 and was implemented following the September 21, 2011 FOMC meeting. Its goal was to keep long-term rates, used by financial institutions to set rates for consumer and business borrowers, lower than they would have otherwise been by selling some of the Fed’s existing holdings of shorter dated Treasury holdings and buying longer dated Treasuries in the open market. While some market participants continue to debate the effectiveness of Operation Twist, the market’s real concern is likely to be what happens next.

What the FOMC decides to do once Operation Twist ends, if anything, will largely be determined by how economic (Gross Domestic Product [GDP] growth and the unemployment rate) data along with inflation excluding food and energy prices (core inflation) behave in absolute terms, and also relative to the FOMC’s projections for these metrics. As part of the increased transparency, the FOMC began publishing its forecast four times a year following each of the two-day FOMC meetings, in April 2011. Prior to that, the FOMC published its projections for key economic variables, but with a lag, including the forecasts in the minutes of the FOMC meeting, which are released three weeks after the conclusion of the meetings.

Fed Forecasts

The forecasts made at the January 24 – 25, 2012 FOMC meeting saw a slightly lower path for GDP growth in 2012 and 2013 (versus the forecast made in November 2011), but also a slightly lower (better) unemployment rate forecast than was made in November 2011. The FOMC’s projections for inflation in 2012 and 2013 were little changed between the November 2011 forecast and the January 2012 forecast.

The forecasts released by the FOMC this week will likely show slightly stronger GDP growth for 2012 than the forecast made at the January 2012 FOMC meeting, and a slightly lower (better) unemployment rate forecast. The inflation forecast is likely to be little changed.

These forecasts are best viewed in comparison to the FOMC’s projections of the “long run” forecast for each of the variables. The forecast for real GDP growth over the long run (a good proxy for where the FOMC thinks the “normal rate” of economic growth is) made in January 2012 pegged GDP growth at around 2.5%, the “normal” unemployment rate at 5.6%, and overall inflation near 2.0%. Over the past few years, the FOMC’s view of the long-term potential growth rate of the economy has moved down a bit, while its forecast of the “normal” unemployment rate has crept up a bit. Its forecast of what the “normal” rate of inflation is over the long term hasn’t budged much.

Fed Policy Firming

Also of interest to market participants will be any shift in the FOMC’s view on when the first “policy firming” (or what we used to call a rate hike) by the FOMC is likely to occur. Again in the spirit of increased transparency — which has been a hallmark of the Bernanke Fed, especially since the onset of the worst of the Great Recession and financial crisis in early 2009 — the FOMC began publishing the forecasts of its own policy actions at the conclusion of the January 2012 FOMC meeting. At that meeting, well more than half (11 of 17) FOMC members expected the FOMC’s first policy tightening in 2014 or later. Five of the 17 members of the FOMC expected the FOMC’s first “policy firming” to occur in 2015, but notably, two of the FOMC’s more “dovish” (those who favor the employment portion of the Fed’s dual mandate to promote full employment and low and stable inflation) members didn’t see any policy firming until 2016! At the other end of the spectrum, three of the more “hawkish” (members who favor the low and stable inflation side of the Fed’s dual mandate) saw the FOMC first firming policy this year. This time around, we could see a few of the four ‘15ers join the five ‘14ers, given the somewhat better tone to the economic data (until the last few weeks) since the January 2012 FOMC meeting.

Putting It All Together

In short, this week’s FOMC meeting, the accompanying policy statement, the Bernanke press conference, the FOMC statement, and the accompanying economic and policy projections are likely to provide plenty of fodder for financial markets in an already busy week for corporate earnings and economic data. However, the key question the market wants answered this week: Will the Fed embark on another round of quantitative easing (QE3) once Operation Twist ends, may go unanswered.

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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.

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).

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.

This research material has been prepared by LPL Financial.

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/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-063134 (Exp. 04/13)

Weekly Economic Commentary

March Job Report Disappoints, but Labor Market Continues to Heal

The March employment report, released on Friday, April 6, 2012, was a disappointment relative to both expectations and the labor market data in recent months. Some of the disappointment in March 2012 may have been “payback” for a much warmer-than-usual winter. On balance, however, the report and its underlying details suggest that the labor market continues to heal, but it still has a long way to go to get back to normal. The lackluster March jobs report also puts another round of quantitative easing (QE) back on the table for the Federal Reserve (Fed).

The March employment report revealed that the economy added 121,000 private sector jobs in March, far fewer than the consensus expectation of 215,000, and well below the 250,000 jobs created on average in the three months ending in February 2012. In fact, the result was below the lower end of the range of consensus expectations (+185,000 to +265,000). This has happened in just nine of the 63 months since early 2007. Despite the disappointment, there were some bright spots in the report, including the drop in the unemployment rate to 8.2% from 8.3% in February. The financial markets initially reacted poorly to the data. However, the March jobs report does little to change our view that the U.S. labor market is healing, albeit slowly, but still has a long way to go to recoup all of the jobs lost during the Great Recession.

Behind the unambiguously disappointing headline job count, there were several bright spots in the March jobs report.

·        With the 120,000 gain in March, the economy has now added jobs in each of the past 25 months, the longest such streak since mid-2005 through mid-2007.

·        The diffusion index — the number of industries adding workers less the number of industries shedding workers — stood at a robust 67.9% in March, and averaged 68% in the first quarter of 2012, one of the highest readings in 20 years.

·        The manufacturing sector added 37,000 jobs in March 2012, the 16th time in the last 17 months that manufacturing jobs have increased. Q1 marked the third best quarter (Q3 1987 and Q4 1997) for manufacturing employment since the middle of 1984.

·         State and local government employment, which has been a significant drag on overall employment for almost four years, may be stabilizing. State and local government employment fell just 1,000 between February and March 2012, but actually increased by 14,000 in the first quarter of 2012, the first quarterly gain in nearly four years. In 2011, state and local governments shed more than 20,000 jobs per month, and shed more than 650,000 jobs since August 2008, as they struggled to align costs with reduced revenues. Looking ahead, the recent data from this report, as well as from state and local government budgets and from surveys of layoffs in state and local governments, all suggest that the worst may be over for job losses at the state and local government level.

·        The private sector economy created more jobs (635,000) in the first quarter of 2012 — or 212,000 per month — than in any quarter since the first quarter of 2006, when the economy, as measured by real Gross Domestic Product (GDP), was growing at 5.1%. While some of the increase in jobs was likely due to warmer-than-usual weather during the quarter, the vast majority of the jobs created recently likely represent actual economic activity. Weather-sensitive jobs excluding construction (Retail, Transportation & Warehousing, Services to Buildings and Dwellings, and Leisure & Hospitality) rose just 24,000 in March 2012 after the 26,000 gain in February. This metric posted an average gain of over 100,000 per month in the three months ended in January 2012. In short, the 212,000 jobs created on average, per month, in the first quarter is probably closer to the underlying trend of job growth than the 250,000 or so jobs added in the three months ending in February 2012, which were likely boosted by the warmer-than-usual winter.

Between February 2008 and February 2010 — during and immediately after the Great Recession — the economy shed 8.9 million private sector jobs. Since February 2010, the economy has added 4.1 million private sector jobs. Thus, the economy still needs to add 4.8 million jobs to recoup all the jobs lost during the Great Recession. If the economy creates private sector jobs at the pace it did during the first quarter (210,000 per month), it would take until the beginning of 2014 (another 22 months) for the economy to get back to peak employment. As we have noted in previous commentaries, many of the jobs lost during the downturn (Construction, Financial Services, and Real Estate) may never come back. But as of the end of January 2012, there were over 3.4 million open jobs in the economy (Please see the April 3, 2012 Weekly Economic Commentary for more details).

We often get asked about the “quality” of the jobs being added each month. What are the workers being paid? Are the jobs full-time or part-time? Our answer to that question is simply that the best gauge of the labor market may not be the jobs report at all, but rather the personal income and personal spending report that comes out three weeks after the monthly jobs report is released. In that report (the March 2012 personal income and spending report is due out on April 30, 2012) the personal income data, which basically adds up all the income made throughout the economy, is key. Personal income — which includes income from wages and salaries, but also from rental income, interest received and transfer payments (social security, unemployment insurance, Medicare payments, etc.) from the government — provides the buying power for personal spending, which in turn accounts for two-thirds of GDP.

Recently, personal income growth has been running about 3% above its year-ago levels, a big improvement versus the 3 – 4% year-over-year declines during the Great Recession, but still far below the “normal” pace of income gains (5 – 7%). Compensation of employees, which accounts for about two-thirds of personal income, and is a good proxy for employment growth, is running about 4% above year-ago levels. This takes into account that in recent months, about 19% of the jobs in the economy are part-time jobs. During the 2001 – 2007 economic expansion, only 17 – 18% of jobs in the economy were part-time jobs. Presented another way, in March 2012, 81% of the jobs in the economy were full-time jobs, and just 19% were part-time jobs. The economy has added 2.7 million full-time jobs over the past year, and shed 233,000 part-time jobs. As recently as June 2012, the economy was still shedding full-time jobs (621,000 in the 12 months ending in June 2011), and adding part-time jobs (878,000 in the 12 months ending June 2011). Thus, despite the disappointment in March 2012 relative to expectations, the labor market today is far stronger than it was in the middle of 2011, but still not booming.

While Fed policymakers are likely to take note of all of these crosscurrents in the latest employment report, their key takeaway is likely to be similar to ours: the labor market is healing and is probably in better shape than it was last summer, but the economy is probably not growing quickly enough to generate more than 200,000 – 225,000 jobs per month. Is job growth at that pace enough to convince Fed policymakers that the economy does not need another round of QE? In our view, probably not, and the conversation in the marketplace about QE3 will likely heat up in the coming weeks. Although we do not expect the Fed to announce QE3 at the next Federal Open Market Committee (FOMC) meeting (April 25), it is likely to be discussed, and it could be introduced as soon as the FOMC meeting in late June. Please see our Weekly Economic Commentary from March 13, 2012 for our insights into what another round of quantitative easing from the Fed might look like.

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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.

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).

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.

This research material has been prepared by LPL Financial.

LPL Financial 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/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-059464 (Exp. 04/13)

Weekly Economic Commentary

Jobs Looking for People

A number of key reports due out this week will tell market participants how many jobs were added in March 2012, in what industries the jobs were added, how much workers were paid, and why workers were unemployed. If the consensus is correct, the private sector economy will add more than 200,000 jobs for the fourth consecutive month, and the nation’s unemployment rate will stay at 8.3%. Each month, financial markets and the media turn the monthly jobs report into the most closely watched economic indicator on the calendar. A few days later, the same government agency — The Bureau of Labor Statistics within the Department of Labor — will release a report called the job openings and labor turnover (JOLTS) report with little fanfare from the financial markets or the financial media.

The JOLTS report does not get a lot of attention, mainly because it is dated (the next report due is for February), and by then, the market already has plenty of information on the labor market in March, including a reading on initial claims for unemployment insurance — a closely watched weekly metric on the labor market — for the week ending April 7. However, the JOLTS data provides more insight into the inner workings of the labor market than the monthly employment report does. One key takeaway from the JOLTS data is that small and medium-sized businesses in the South are looking for highly skilled workers.

JOLTS provides data on:

·         The number of job openings economy-wide, by firm size, and by region,

·         The number of new hires in a given month, and

·         Job separations.

On the surface, the data reveals just how dynamic the U.S. labor market is, demonstrating how the economy creates (and destroys) tens of millions of jobs a year. It can also help us answer questions we receive quite often in the LPL Financial Research Department like: Where are all the jobs coming from? What do those jobs pay? What kind of companies are hiring, and where are the jobs located?

At the end of January 2012 (the latest data available), there were 3.1 million job openings, up from 2.1 million open jobs at the start of the economic recovery in June 2009. However, the 3.1 million open jobs at the end of January 2012 was more than a million fewer than at the end of the 2001 – 2007 recovery. Thus, the JOLTS data tells a familiar story: The labor market is healing, but it still has a long way to go to get back to normal.

Where Are the Jobs?

The industry group that has seen the biggest percentage change (nearly 100%) in the number of open jobs since the start of the recovery is the professional and business services area, where there are currently 729,000 open jobs, nearly double the amount in June of 2009. Note that jobs in this category pay on average 15% more ($23 per hour versus $20 per hour) than the average job.

Jobs in this category include:

·         Legal services,

·         Accounting and bookkeeping,

·         Architectural and engineering services,

·         Computer systems design,

·         Management and technical consulting services, and

·         Temporary help services.

With the exception of temporary help services, which are a catch-all for temporary employment agencies, the vast majority of the jobs in the professional and business services area appear to be in professions that demand advanced education or training. Indeed, in recent Beige Books — qualitative assessments of banking and business conditions compiled for the Federal Reserve (Fed) by private sector business owners and bankers prior to each of the eight Federal Open Market Committee (FOMC) meetings a year — there have been scattered reports of labor shortages in certain industries. In addition, in recent public appearances, Fed Chairman Ben Bernanke has noted that a mismatch exists between skills and open jobs.

How Much Do They Pay?

Job openings have surged in the relatively low paying ($12 per hour on average) leisure and hospitality area (by 68%) and by 36% in retail ($14 per hour). But large increases in job openings since the beginning of the recovery have not been limited to low paying jobs. Manufacturing (by 54%) and construction (by 44%), which are among the highest paid jobs, have seen sizable increases in the number of open jobs. There has only been an 18% increase in open jobs in the health care and education area, as these sectors didn’t see many job cuts during the recession. Government job openings have increased by just 12%, with a decent gain in state and local openings almost entirely offset by a drop in job openings at the Federal level.

What Kinds of Companies Are Hiring?

Since the early 1990s, small businesses have created two-thirds of the jobs in the United States. The Bureau of Labor Statistics collects this data, but it lags the other data mentioned in this commentary, and the most recent report is from the middle of 2011. However, some private sector firms collect data on hiring by firm size, most notably, in the ADP employment report, which is also due out this week. The data shows that small businesses (under 499 employees) have done virtually all of the hiring in the last two years. Recent surveys do show an uptick in small business optimism, albeit from very low levels, helping to corroborate the hiring data. But returning to the JOLTS data, we find that the entire increase in open jobs since the start of the recovery, can be accounted for by firms between 1 and 249 employees. While larger firms have seen increases in open jobs, the vast majority of the increase in job openings over the past two-and-a-half years has come from small businesses. As of the fourth quarter of 2011, 75% of the job openings were at firms with less than 250 employees. This suggests that confidence and certainty in fiscal and monetary policy and in overall leadership in Washington will be keys to sustaining the gains made in the job market in recent months.

What Regions Have the Most Job Openings?

The region with the most openings (1.43 million) and the biggest increase in job openings since June 2009 is the South. On the other hand, the Northeast has seen the smallest increase in job openings in the past two-and-a-half years and also has the fewest open jobs right now. The Western region has fared a bit better than the Northeast, but still has seen the second-smallest increase in job openings and has the second lowest number of open jobs. One explanation for the lagging performance in these two regions is that both were hurt by: 1) the collapse in the real estate bubble (fewer construction jobs); and 2) the Northeast was also hurt by the collapse in the financial services sector due to the bursting of the real estate bubble. Looking around the country at open jobs by industry, firm size, and pay, it seems like a good time to be a highly skilled worker in the South looking for work in a small to medium-sized business.

In a speech to a group of business economists in late March, Bernanke noted that in order for the unemployment rate to drop further from here (it has moved down by nearly a full point since last summer to 8.3%), the economy needs to pick up steam. Our view remains that the labor market continues to heal at a modest pace. The economy has added 3.9 million private sector jobs since February 2010, after shedding 8.8 million jobs between early 2008 and early 2010. At 8.3% the unemployment rate is well below the recent peak (10.0% in late 2009), but nearly double the rate seen (4.4%) prior to the Great Recession. The broadest measure of unemployment, which includes those working part time, and those who have given up looking for work, stood at 14.9% in February, down from 15.1% in January and a recent peak of 17.2% in late 2009. This measure of slack in the labor force is still nearly double what it was (7.9%) prior to the onset of the Great Recession.

_______________________________________________

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 #1-057980 (Exp. 04/13)