Weekly Economic Commentary

Policymakers, Pundits, and Politicians Eye the May Jobs Report

The May jobs report is due out on Friday June 1, 2012, and as always, market participants and policymakers will closely watch the report. This year is an election year, of course, so the politicians and political pundits will have plenty to say about the report as well.

Market participants are looking for an increase of 160,000 private sector jobs in May 2012, a slight acceleration from the 130,000 jobs created in April 2012, but well below the 250,000 per month pace of job creation seen between December 2011 and February 2012, which was likely inflated by much warmer-than-usual weather during those months. The 130,000 private sector jobs added in April 2012 were the fewest in any month since August 2011 (52,000), and most likely represented the final month of “payback” for the warmer-than-usual winter weather that likely inflated the payroll count between November 2011 and February 2012. Last fall, prior to the warmer weather, the economy was creating around 150,000 jobs per month. The true pace of underlying job growth is likely somewhere between 150,000 and 250,000. In our estimation the true pace of employment growth is in the 175,000 to 200,000 range.

Compared to last fall, when the level of initial claims for unemployment insurance was running over 400,000 per week, the level of initial claims filed each week in May 2012 (under 375,000 per week) suggests that hiring is a bit more robust today than it was last fall. Several other indicators suggest that the economy is probably creating more jobs than it was last fall (150,000 per month), but not many more:

·         The increase in consumer sentiment,

·         The better consumer spending in recent months,

·         The near-record level of corporate profits and cash flows,

·         The increase in job openings, and

·         The number of job quitters as a percent of overall job separations.

Policymakers at the Federal Reserve (Fed) also will likely have a keen interest in the May jobs report, which will be the last one prior to the key June 19 – 20 Federal Open Market Committee (FOMC) meeting.

·         If the economy is creating closer to 100,000 jobs per month in the coming months, the Fed is more likely to act to replace “Operation Twist” with some other type of monetary stimulus (QE3) when it ends at the end of June.

·         If, however, the economy is creating around 150,000 jobs per month, it is likely to be a close call whether the Fed announces a new stimulus program.

·         Based on Fed Chairman Ben Bernanke’s statements, job gains over 200,000 or so might see the Fed hold off on more stimulus, although events in Europe or the upcoming fiscal cliff here in the United States might force the Fed‘s hand.

A quick review of Fed Chairman Bernanke’s most recent comments on the labor market may be a helpful guide on this topic. Other than a speech on bank regulation on May 10, 2012, Bernanke has not spoken publicly since his press conference following the April 25 FOMC meeting. And as this publication is being prepared, he is not scheduled to speak again until his press conference after the June 19 – 20 FOMC meeting.

In that April 25 press conference, Bernanke noted that the economy needs to generate around 100,000 or so jobs per month to keep the unemployment rate, currently at 8.1%, steady. He went on to say that the economy needs to generate between 150,000 and 200,000 jobs per month to achieve the Fed’s forecast of lowering the unemployment rate to under 8.0% by the end of 2012. Bernanke said that because of the warmer weather and an unusually strong labor market in the final few months of 2011 and in early 2012, he expected that jobs gains in the months ahead “will be somewhat less than the 250,000 a month that we’ve been seeing recently.” He also said that “we’ll continue to be watching the labor market. That’s a very important consideration. If unemployment looks like it’s no longer making progress, that’ll be an important consideration in thinking about policy options.”

Politicians and pundits will also likely pick apart the May jobs report, although another five jobs reports will be released before the general election on November 6, 2012. When President Obama took office in January 2009, the unemployment rate was 7.8% and rising, hitting a peak of 10.0% in October 2009, four months after the end of the recession.

At the beginning of the 2007 – 2009 Great Recession, the unemployment rate was 5.0%; the rate hit a cycle low of 4.4% in late 2006 and early 2007.

The unemployment rate is currently at 8.1% and still above where it was (7.8%) when President Obama took office. Looking ahead, the Bloomberg consensus says that the unemployment rate will average 8.0% in the fourth quarter of 2012, little changed from where it is today. In fact, only four of the 64 economists recently surveyed by Bloomberg think the unemployment rate will be lower in the fourth quarter than it was when President Obama took office. How the unemployment rate performed during the past 10 presidential elections (1972 – 2008) provides plenty of history from which to draw comparisons.

Comparing the unemployment rate in October of each election year since 1972 to the unemployment rate in January of the first year of the first term, we find that in five election cycles the unemployment rate was the same or lower in October of the election year versus where it stood at the start of the term. Those elections were:

·         1980

·         1984

·         1988

·         1996

·         2000

In three of those five elections (1984, 1988, and 1996) the incumbent was reelected. In the other five elections since 1972, the unemployment rate in October of the election year was higher than it was when the presidential term began. The incumbent party was reelected in two of those five elections: 1972 and 2004. Thus, if the last 10 election cycles are any guide, the President's chances of re-election would increase if the unemployment rate is at 7.8% or lower by October of this year.

Among economic indicators, while the unemployment rate is politically important, and garners a great deal of attention in the media, real after-tax personal income is probably a better economic indicator to rely on to help determine election outcomes. As noted in the April 2, 2012 Weekly Market Commentary, the impact of the economy on the election can most clearly be seen through the relationship between income growth in the year leading up to the election and election results. Inflation-adjusted, after-tax income growth of about 3 – 4% appears to be the threshold for incumbents to get 50% of the popular vote. This measure of per capita income, contained in the most recent (March 2012) Personal Income and spending report, is only growing at 0.6%.

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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.

The fast price swings in commodities and currencies will result in significant volatility in an investor's holdings.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

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.

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 #1-071923 (Exp. 05/13)

Weekly Economic Commentary

The Ebb of Energy & Eating Costs

In the spring of 2011, U.S. consumers were hit with high energy and food prices. This double whammy drove headline consumer prices, as measured by the Consumer Price Index (CPI), from a 1.1% year-over-year gain in late 2010 to nearly 4.0% by the fall of 2011. A rapid acceleration in food and energy prices accounted for most of the acceleration in overall inflation. Combined, these two components of the CPI account for less than 15% of the overall index. But because consumers make purchases of food (grocery stores) and energy (gas stations) quite often, rising prices in these two categories captured the public’s (and the media’s) attention.

Pain at the Pump and in the Grocery Aisle

The sharp acceleration in food and energy prices made headlines nearly every day in the spring and summer of 2011; after all, many Americans make several visits to gasoline stations and grocery stores every week. Higher prices and more related media coverage were a large contributor to the slide in consumer sentiment over the spring and summer of 2011. However, the acrimonious debate in Washington over the debt ceiling and the volatility in financial markets due to the debt ceiling debate and the European sovereign debt problems were also to blame.

Growth in real consumer spending (which accounts for two-thirds of economic activity) slowed sharply between late 2010 and the middle of 2011, from a 3.6% pace in late 2010 to under 1.0% in mid-2011, partly because consumers were diverting some of their discretionary incomes to purchase “must-have” items like groceries and gasoline.

Just how rapid were the price increases in these categories? Energy prices in the CPI accelerated from 4.0% year-over-year in late 2010 to 22% year-over-year in mid-2011, as a gallon of gas increased from under $2.75 in the fall of 2010 to nearly $4.25 in the spring of 2011. The rise in gasoline prices, in turn, was driven largely by the Arab Spring uprisings that rolled across the Middle East in the winter and spring of 2011, driving oil prices from around $70 per barrel in September 2010 to as high as $114 per barrel in April 2011.

Food price inflation accelerated from under 1.0% year-over-year in the fall of 2010 to a 6.3% year-over-year gain in the fall of 2011. That rapid increase, which was accompanied by almost constant reinforcement from local and national media about rising prices for staples like bread and milk, was a result of a near-doubling of agricultural commodity prices between mid-2010 and early 2011. The rise in prices for agricultural commodities was largely the result of supply shocks caused by poor weather, reduced inventory levels of key agricultural commodities, and a full resumption of economic activity in low and middle income countries around the world.

Fuel Fares

This year, food and energy prices are more muted, and should head lower over the remainder of 2012, with food prices leading the charge lower. Gasoline prices again reached $4 per gallon this spring but have receded sharply since the early April peak in prices. Here again, gasoline prices are being driven by oil prices. Until recently this year, oil prices have held in a narrow range between $95 and $110 per barrel, hitting the high end of that range in late February 2012, amid concerns over an attack on Iran’s nuclear facilities. Since early May 2012, oil prices have dipped to nearly $90 per barrel amid concerns that global economic growth will slow as the European fiscal crisis flares up again. A spike higher in oil prices is possible later this year if: 1) there is more unrest in the Middle East; 2) there is an active Atlantic hurricane season; or 3) tensions around Iran’s nuclear capabilities flare up again. However, oil prices are likely to remain near $100 per barrel, which suggests that gasoline prices should remain under $4 per gallon. Gasoline near or under $4 over the remainder of the year would put little upward pressure on the CPI for energy products, and would help drive headline CPI back under 2.0% by the end of the year.

Grocery Prices Going Down

The bigger driver of further deceleration in headline inflation, however, may be food prices. Changes in the price of agricultural commodities leads to changes in food prices, as measured in the CPI by around seven months. As noted above, prices of agricultural commodities surged in 2010 and early 2011, but have moderated since, turning negative on a year-over-year basis late in 2011. Prices of agricultural commodities have dropped by nearly 25% since peaking in early 2011, and are down 17% from a year ago. The drop in prices of agricultural commodities came as weather improved, inventories were built, and as some global trade policies normalized. If the traditional relationship holds between prices of agricultural commodities and the CPI for food, we could see food prices turn negative on a year-over-year basis by the fall of 2012. This would continue to push headline inflation below 2.0% (from the current 2.3% year-over year reading), providing the Federal Reserve with enough wiggle room to embark on another round of quantitative easing (QE3) if necessary later in the year.

On balance, the surge in food and energy prices that drove headline inflation sharply higher in the spring and summer of 2011, which weighed on consumer sentiment and sharply curtailed consumer spending in early to mid-2011, has faded. Prices of energy and agricultural commodities have been much better behaved in 2012, and point to decelerating headline inflation over the remainder of 2012.

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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 fast price swings in commodities and currencies will result in significant volatility in an investor's holdings.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

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.

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 #1-070130 (Exp. 05/13)

Weekly Economic Commentary

Lessons From the Labor Market

More than four million children were born in the United States in 1990, the most in any year since the tail end of the baby boom in 1961. Twenty-two years later, in 2012, more than 1.8 million will earn a bachelor’s degree and either enter the workforce or move on to more schooling (graduate school). In addition, approximately 3.2 million students, most born in 1994, will graduate from high school this spring, and face the same choices as college grads. While the unemployment rate for those in the 16-to-24-year-old age group remains disturbingly high, more education and more skills can raise the odds of landing a job. The good news is that the latest data on job openings in the economy, as measured in the Job Openings and Labor Turnover (JOLTS) data, reveals that nearly 3.8 million open jobs awaited this year’s graduates, the highest number of job openings in four years. The bad news is that many of those open jobs require skills and education that may not match this year’s graduating class.

Twenty-two Years Later, Higher Education Continues to be a Driver for Employers

The ability to attend and finish college and earn a degree has a major impact on the unemployment rate. The unemployment rate for people who have earned at least a college degree is 4.0%, still more than double what it was prior to the onset of the Great Recession, yet only half the unemployment rate (8.0%) for those who have graduated from high school, but not earned a college degree. Your odds of landing one of those aforementioned 3.8 million open jobs are even worse if you do not have a high school diploma. The unemployment rate for high school dropouts is 12.5%, 8.5 percentage points above that for those with a college degree. At its widest during the Great Recession, the difference in the unemployment rate between those with a college degree or more and those without a high school diploma was nearly 11 percentage points. The Great Recession, and its aftermath, has clearly taken a big toll on workers with less education, fewer skills, and limited experience.

Data through April 2012 reveals that the overall unemployment rate stood at 8.1%, as 12.5 million people were unemployed out of a labor force of 154 million. The good news for new entrants to the labor force (essentially high school and college graduates) is that the unemployment rate among these new entrants was only 0.9%. The bad news is that this is triple what it was prior to the onset of the Great Recession and has not been this high on a consistent basis since the aftermath of the severe 1981 – 82 recession. New entrants to the labor market today need to have more skills, which often means more education, and more experience than ever to land that first job.

Those five million new high school and college graduates in 2012 can expect to look for work for around 20 weeks, which is the median number of weeks an unemployed person is looking for work these days. The good news here is that the median duration of unemployment has come down in recent months and is well below its Great Recession highs. In the year after the end of the Great Recession, it took the median unemployed worker 25 weeks to find a job, but at 20 weeks today, it still takes two-and-a-half times longer than it took to find a job in the mid-2000s, when the median duration of unemployment was around eight weeks. As we will see later, in the mid- 2000s, it was relatively easy for an unskilled worker to step into the labor force to find a job relatively quickly. The shifting dynamics of the labor market since the mid-2000s mean that more skills and more education are required today to land a job.

The latest data on unemployment rates by industry help to tie together some of the issues previously noted. The unemployment rate in the construction industry, which stood at less than 5.0% during the peak of the housing boom in mid-2006, soared more than five-fold to 27% by early 2010. Few other industries suffered as much during the recession, although the unemployment rate in the financial, mining, manufacturing, and government sectors were badly hurt as well, with the unemployment rates in these industries increasing by three and four-fold from pre-recession levels by early 2010. The economic recovery that commenced nearly three years ago in June 2009 and the jobs recovery that began in early 2010 have helped to drive the overall unemployment rate down to 8.1% from its peak of 10%. There were only 2.2 million open jobs when the economic recovery began, as measured by the JOLTS data, and now there are 3.8 million.

Mining for Jobs

The general improvement in the economy helped to drive the unemployment rates in many of the hardest hit industries lower, as well. For example, the unemployment rate in the mining sector, which soared to over 16% in early 2009 as energy prices and energy demand collapsed, fell to just 4.2% in April 2012, and is nearly back to its 2004 – 2006, pre-Great Recession average. In fact, despite numerous regulatory hurdles, the job count in the mining and oil and natural gas industries has increased by 30% from 2009, and employment in this industry is well above its prior peak, even as overall employment remains well below its 2007 peak.

Generally speaking, jobs in the mining industry require more specialized skills, like being able to operate the complex machinery in and around a mining or drilling operation and education. Many of the jobs in the mining industry also require advanced degrees in engineering and sciences- than most other industries. The outlook for the growth in this sector of the economy looks promising, given rising energy prices around the globe and the prospects for more relief on the regulatory front after the Presidential and Congressional elections in the fall.

Manufacturing Jobs

Similarly, the unemployment rate in the manufacturing sector, which surged from under 4% in 2005 and 2006 to as high as 13% in 2010, has now moved down to under 7%. Job openings in the manufacturing sector now stand at 326,000, only slightly below the open manufacturing jobs seen in 2007. Today, there are nearly three times more open manufacturing jobs than there were at the end of the recession.

As we have noted in recent Weekly Market Commentaries, the manufacturing sector has benefitted in recent quarters from a move by some U.S. corporations to bring manufacturing jobs back to the United States. Political arm twisting, along with poor quality control overseas, the narrowing wage gap between workers and the United States and many emerging market nations, and low fuel costs here in the United States have helped to foster this trend. Although no hard data exists on this, anecdotal evidence suggests that manufacturing jobs being “on-shored” require more education and skills than ever before. This helps to explain the huge gap in the unemployment rate between those with less than a high school education (i.e. low skills and less educational attainment) and those with a college degree or higher.

Trimming Jobs from the Budget

The unemployment rate in the government sector, which hovered around 2% in the mid-2000s, soared to 6.5% in mid-2011 as state and local governments cut workers to better align costs (salaries and benefits for government employees) with lower tax revenues. At nearly 4% today, the unemployment rate for government workers remains nearly double what it was prior to the recession, but is unlikely to move down much further given the ongoing budget issues at the federal and state and local levels. The number of open jobs in the government sector (per the JOLTS data) stands at around 375,000 jobs, little changed over the past few years.

Although the worst may be over in terms of job reductions at the state and local government level, the outlook for sustained job growth in the government sector is muted at best. The prospects for more budget cuts at the Federal level in the next few years (many of which will ultimately filter down to the state and local level) suggest that only the most highly skilled and highly educated workers will be likely to hold on to their current jobs, or be hired into new jobs in this segment of the labor market.

Building New Jobs

The construction industry was arguably the biggest beneficiary of the housing boom that began in the late 1990s. In 1992, there were around 4.5 million construction jobs as the economy struggled to dig out of the 1990 – 91 recession. By the end of the decade, the number of construction jobs had increased by 50%, to 6.8 million. After a brief lull in the early 2000s, as the economy recovered from the mild 2001 recession, construction employment increased by another one million to nearly 7.8 million by 2006. The unemployment rate for construction workers stood at just 4.5%. At this point, nearly 7% of all private sector jobs were in the construction industry,

the highest since the late 1950s. Again, while there is no hard data on this, traditionally an entry level job in the construction industry was a way for an unskilled worker to break into the labor force. At the same time, however, increasingly complex construction methods, regulatory issues, engineering advances, etc., have also provided plenty of high paying jobs for workers with a higher level of skills and educational training. In mid-2006, the unemployment rate for those workers with less than a high school education hit an all-time low of 5.8%.

Since then of course, the housing bubble burst, commercial construction dried up, and construction employment plummeted. From a peak employment level of nearly 7.8 million, the number of persons employed in the construction industry plunged by 30% to 5.4 million by early 2011, a level last seen in the mid-1990s. The unemployment rate for construction workers moved from 4.5% in 2006 to 27% in 2010, increasing more than five-fold. It stands at 15% today, down from the peak, but still nearly four times as high as it was in 2006, and approximately double the unemployment rate for the entire economy. Similarly, the unemployment rate for those without a high school degree, at 12.5%, is below its peak of nearly 16%, but remains very close to all-time highs. The good news is that the housing market is in the process of stabilizing nationwide, and construction employment appears to have stabilized as well. The recent JOLTS data says that there are nearly 100,000 open construction jobs in the economy today, up from less than 30,000 in early 2010. At the peak, there were nearly 300,000 open construction jobs. The economy is unlikely to see that many open construction jobs anytime soon, but as with the other sectors discussed in this publication, those most likely to retain their jobs in the highly specialized construction trades are likely to be those with the best skills and the most education.

On balance, the labor market continues to track toward a modest pace of job growth (150,000 to 200,000 net jobs created per month). For the freshly minted high school and college graduates leaving school and entering the workforce this spring and summer, the right mix of skills and experience will be necessary to land that first job. The unemployment rate among people aged 16 to 19 (roughly equivalent to high school dropout and those with a high school diploma) is a staggering 25%, down from 27% in 2009 and 2010, but still among the highest youth unemployment rates on record. For those aged 20 to 24, which includes some college graduates, the unemployment rate is still a daunting 13.2%, well off its 2009 – 2010 peaks, but still among the highest on record. The data suggest that more education, not less, and more skills and work experience will provide this year’s graduates with a better chance at beating those odds.

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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.

Job Openings and Labor Turnover Survey (JOLTS) is a survey done by the United States Bureau of Labor Statistics to help measure job vacancies. It collects data from employers including retailers, manufacturers and different offices each month. Respondents to the survey answer quantitative and qualitative questions about their businesses' employment, job openings, recruitment, hires and separations. The JOLTS data is published monthly and by region and industry.

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.

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 #1-068410 (Exp. 05/13)

Weekly Economic Commentary

License to Spend

In our 2012 Outlook we wrote, “U.S. gross domestic product (GDP) is likely to produce below-average growth of about 2% in 2012, supported by solid business spending and modest, but stable, consumer spending” and that U.S. business spending would grow at several times the pace of consumer spending in 2012. With data on GDP now in hand for the first quarter of 2012, it appears that business capital spending has plenty of catching up to do over the final three quarters of 2012. While businesses have been generating record profits, leaving corporate cash flows close to all-time highs, they have been reluctant to add to staff or do much capital spending in early 2012, preferring other uses for their cash.

The Skills to Pay to the Bills

·         Acquire other companies. Merger and acquisition (M&A) activity, while nowhere near as robust as it was prior to the Great Recession, has ramped up quickly since the end of the recession. Global M&A activity has increased by close to 40% since the middle of 2009, according to Bloomberg data.

·         Initiate or increase dividend payments to shareholders. According to Standard & Poor’s Index Services, 677 companies either initiated or increased dividends to shareholders in the first quarter of 2012, the most in any first quarter since 2007. S&P 500 companies paid out $240 billion in dividends to shareholders over the four quarters of 2011, the best four quarters for dividends since the four quarters ending in the third quarter of 2008, when many financial institutions slashed or eliminated their dividends as the Great Recession worsened. As we have noted in prior commentaries, corporate dividend strategies face uncertainty at the end of this year as the Bush tax cuts (which put the tax rate on dividends at 15%) are set to expire. Many firms may want to issue special dividends ahead of this date, thus diverting funds that could be used for capital spending.

·         Buy back shares. According to Standard & Poor’s Index Services, share buybacks, another way companies can deploy cash to shareholders, totaled $409 billion for S&P 500 companies in 2011, a 40% increase from the $299 billion in buybacks in 2010. The year 2011 saw the most buyback activity since mid-2008, prior to the onset of the worst of the Great Recession in the fall of 2008. Although share prices have increased 25% since the fall of 2011, making it more expensive for corporations to buy back shares, share buybacks should at least match 2011 levels in 2012.

Legislation and Weather May Have Sabotaged Business Capital Spending in Early 2012

Part of the slowdown in business capital spending in early 2012 relative to the robust pace seen in 2011 (and to the pace of consumer spending) may have been related to legislation and the weather. As we have discussed on several occasions in these pages, the much warmer-than-usual weather in the first three months of 2012 likely pulled forward some consumer spending into the winter months from the spring months, artificially boosting consumer spending, which grew at a 2.9% annualized rate in the first quarter. Business capital spending, which is not as weather sensitive, grew at just a 1.7% annualized rate in the first quarter of 2012.

The slow pace of business capital spending growth in the first quarter of 2012, in part, reflects the strength in capital spending in late 2011 which, in turn, may be related to legislation. Business spending was strong in 2011, especially in the final two quarters of the year, as spending rebounded from the supply chain disruptions triggered by the devastating earthquake, tsunami, and nuclear disaster in Japan in March of 2011. Business capital spending surged by 16% and 8% in the final two quarters of 2011, respectively, and increased by 10% over 2011. The year 2011 marked the second consecutive robust year of business spending, after business spending all but dried up in 2007, before declining sharply in both 2008 (4%) and 2009 (-16%). Business capital spending surpassed its previous all-time high (set just prior to the onset of the Great Recession) in the third quarter of 2011, and continued to set new all-time highs in both the fourth quarter of 2011 and the first quarter of 2012.

As noted above, part of the surge in business capital spending in late 2011 may have been related to legislation passed by Congress in December 2010, which allowed businesses to fully expense (for tax purposes) capital equipment purchased before the end of 2011. This probably pulled some capital spending that would otherwise have occurred in early 2012 into the latter half of 2011. The law allows companies to expense only 50% of capital equipment purchased before December 31, 2012 and, as the law stands now, even this provision would expire at the end of 2012, as part of the “fiscal cliff” we have discussed in recent weeks. This uncertainty may have the same impact on business spending this year, especially as we approach the 2012 Presidential and Congressional elections.

Check it Out: What May Boost Business Capital Spending Throughout 2012

Moving beyond legislation, many of the factors we forecast would be in place in 2012 to continue to boost capital spending remain in place. They include:

·         Record cash levels. The aforementioned record level of cash and corporate profits, combined with very low rates of return on these cash assets, is forcing corporate boards to ask corporate managements to put the cash to a more productive use.

·         Near-record low financing rates for businesses. The Federal Reserve (Fed) has promised to keep rates at “exceptionally low levels” until at least 2014. In addition, the Fed’s Operation Twist has kept long-term rates lower for longer, aiding both business and consumer borrowers

·         Steadily increasing loan growth. Commercial and industrial loans by banks to businesses, a key weekly metric of bank lending activity, is at a three-year high, and is up more than 13% from a year ago, the strongest pace of growth in nearly four years.

·         Gradually easing lending standards. Lending standards for loans by banks to finance capital spending, especially for commercial real estate, are easing, though still tight. As noted above, corporate revenue is again growing strongly and is generating large amounts of free cash that is available to finance investment. Yet, tight credit markets are limiting the ability of small and medium-sized companies, generally those without access to financial markets, from taking on new investment projects.

·         Equity prices. The 100%-plus gain in equity prices over the past three years and the 25%-plus gain in stocks over the past six months are notable. No sector of the economy is more highly correlated with movement in equity prices than business capital spending. Further gains in equity markets should fuel more capital spending over the remainder of the year.

·        “Onshoring” trend. We have observed ongoing anecdotal evidence of “onshoring” of jobs, especially in the manufacturing area. Aided by: 1) poor quality control in China, 2) relatively high unemployment, and lowered wage and benefit demands in the United States, and 3) the low cost of fuels like natural gas to help run the plants, an increasing number of big and small companies have moved production back to the United States in recent quarters. Political considerations are also hastening this trend.

·         Capital for labor. An ongoing substitution of capital for labor is occurring, as businesses continue to compete globally using the latest in technology and production processes. In addition, adding new workers often involves paying benefits along with salaries. New machinery, of course, does not require benefits like health care.

·         Average age of productive infrastructure at multi-year highs. The average age of the nation’s productive infrastructure is at multi-year highs, especially in traditional manufacturing, but in many other areas as well. Industries including transportation and warehousing, wholesale trade, retail trade, accommodation, and food services all have seen the average age of their productive infrastructure hit new multi-decade highs since the onset of the Great Recession, as businesses cut investment to protect their shareholders in the downturn.

The sweeping regulatory and legislative changes and prospects for additional changes, affecting sectors such as Financials, Energy, Utilities, and Health Care, that took place in 2010 are fading and may even be reversed — with the outcome of the 2012 election. Therefore, in 2012, business spending may continue to enjoy what may be a new multi-year cycle supported by this clearer regulatory and legislative environment.

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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.

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.

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 #1-066537 (Exp. 05/13)

Weekly Economic Commentary

New Paradigm in Global Growth

For the third year in a row, as April turns into May, global financial markets are growing concerned over a slowdown in global economic activity and from a U.S. perspective, we continue to monitor several key metrics.  But the U.S. economic growth profile tells only part of the story, and in this publication we outline the growth profile of the rest of the world (Europe, Japan, China, and Emerging Markets, etc.) and put the evolving composition of the global economy into perspective. On balance, while our forecasts for economic growth in the United States, Europe, and China have not changed, there have been some noticeable shifts in the forecasts for economic growth around the globe in 2012 and 2013 made by the consensus and by the International Monetary Fund (IMF).

Fed Forecast: Moderate but Above-Consensus Growth

Last week (April 23 – 28), the Federal Reserve’s policymaking arm, the Federal Open Market Committee (FOMC), released its latest forecast for the U.S. economy, pegging real Gross Domestic Product (GDP) growth at around 2.6% this year and at 2.9% in 2013. The forecasts for both years were very close to the forecasts made by the FOMC in January 2012. The forecast for 2012 made last week was about the same as the forecast the FOMC made last fall (November 2011), while the latest 2013 forecast (2.9%) was 0.4% lower than the 3.3% forecast by the FOMC last fall.

As has been the case for the past several years, the FOMC’s outlook for the U.S. economy in the next few years is a bit rosier than the consensus of Wall Street economists. Bloomberg News surveyed 75 economists in mid-April 2012, and they forecast 2.3% GDP growth for the U.S. economy in 2012, and 2.5% in 2013. The LPL Financial Research forecast for 2012 remains a below-consensus 2.0%, a forecast we first made in the fall (November) of 2011. Back in November 2011, the Bloomberg consensus pegged GDP growth at 2.2% in 2012 and 2.5% in 2013, little changed from the most recent consensus forecasts. As an aside, this group puts the odds of recession in the next 12 months at 20%, down from 25% odds back in November 2011.

Consensus Views on Global Growth Mixed

We can also turn to the Bloomberg consensus forecast to take a broader view of the global economic forecast, and how that view has shifted since last fall. The latest round of forecasts from the IMF can also shed some light on the progression of forecasts for 2012 and 2013.

The latest Bloomberg consensus puts global GDP growth in 2012 at 3.4% and growth in 2013 at 3.9%. Both forecasts have been revised down only slightly over the past six months, as the consensus forecast 3.6% growth in 2012 and 4.0% growth in 2013 back In November 2011. The IMF released its economic forecast for 2012 and 2013 in mid-April 2012. It now forecasts global GDP growth at 3.5% in 2012, and 4.1% in 2013. The IMF forecast for 2012 is 0.5% lower than the forecast made in October 2011, while the 2013 forecast is little changed over the past six months.

A closer look at the IMF forecasts reveals that the forecasts for economic growth this year and next in both developed economies (United States, Europe, the United Kingdom, Japan, Canada, Australia, etc.) and in emerging markets (Brazil, India, China, etc.) continue to get revised lower, albeit modestly so. It is important to point out, however, that economic growth in emerging markets continues to run roughly three times as quickly as growth in the developed world, and that the downward revisions to growth in developed markets are more pronounced than the downward revisions to growth in the emerging markets.

Divergence Persists in Regional Growth Forecasts

Digging a bit deeper into these IMF forecasts for 2012 and 2013, we find that the IMF continues to expect a mild recession in Europe in 2012 (-0.3% GDP growth), as modest growth in Germany and France is more than offset by moderate to severe recessions in Italy and Spain. The 2012 outlook for Europe has deteriorated markedly since last fall, mainly as a result of the slowdown in China and the fiscal austerity being imposed in many European nations. We also note that the IMF’s outlook for Japan for 2012 and 2013 has held steady since last fall. Data released this week (April 30 – May 4) are likely to reveal that GDP in several Eurozone economies contracted in the first quarter of 2012. The GDP data for the entire Eurozone is due out in mid-May.

According to the IMF’s forecasts, China is expected to grow at 8.2% this year and 8.8% next year, and so the IMF agrees with our view (and the consensus view, as well) that China can achieve a soft landing in 2012 and 2013. But China has clearly moved into a new phase of its economic growth trajectory after GDP growth surged over the past 10 years. Looking ahead, markets and global policymakers need to adjust to Chinese GDP growth of around 7.5%, rather than the 11 – 12% growth seen in much of the 2000s. Chinese authorities have begun easing monetary policy again (after tightening in 2010 and 2011) and are easing lending standards in some areas of the economy as well. Risks remain in China, however, including the economic and financial implications of a possible property bubble, as China continues its transition from an export-led, externally-facing economy, to a more consumer-led, internally-driven economy, similar in composition to the economies in the developed world. China has come a long way since it burst back on to the global economic stage in the late 1990s and early 2000s, but still has a long way to go.

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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).

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 #1-064807 (Exp. 04/13)