Weekly Economic Commentary

Good Night, Irene

Federal Reserve (Fed) Chairman Ben Bernanke’s widely anticipated speech in Jackson Hole, WY last Friday (August 26) apparently struck just the right tone for markets. The speech allowed market participants to look ahead to several key economic and policy events this week, including the impact of Hurricane Irene in the economy and markets, the August reports on ISM manufacturing, chain store sales, vehicle sales and most importantly, employment, as well as key data on China (August ISM) and Japan (July industrial production, retail sales, and vehicle production).

On the policy front this week, the Fed will release the minutes of the August 9 FOMC meeting, and perhaps more importantly, German Chancellor Angela Merkel holds a key policy conference with her own caucus as the market continues to wait for a policy response from Europe . Japan’s ruling party will choose a new Prime Minister from its own ranks, after the current Prime Minister resigned on Friday, August 26. As with elsewhere around the globe, the path of future fiscal and monetary policy in Japan is crucial to the outlook for the global economy.

Further out on the horizon for markets on the policy front is the now two-day long September Federal Open Market Committee (FOMC) meeting on September 20 and 21, some type of policy actions in Europe, a jobs proposal from President Obama, and ongoing work by the so-called congressional “super committee” tasked with finding at least $1.5 trillion in budget savings by the end of this year.

Potential Economic Impact from Hurricane Irene

Another, shorter term concern for markets is Hurricane Irene, which made its way up the East Coast over the weekend of August 27 – 28. As of Monday morning, August 29, damage estimates were in the $5 to $10 billion range. Although the damage from Irene was less than feared, it caused major disruptions in a very heavily populated area of the country, keeping businesses closed and consumers at home for several days in the key back-to-school shopping season. The high frequency economic data (i.e. initial claims, shipping and rail traffic, weekly retail sales, consumer confidence, auto production, etc.) we, other market participants, and policymakers track may be difficult to interpret for a few weeks due to the impact of the storm. This potential lack of clarity on the underlying health of the economy arrives at a particularly inopportune time, as markets and policymakers try to gauge the true underlying strength of the economy and the risk of recession.

Although several major public transportation systems from the Metro in D.C., to the MBTA in Boston were closed for all or part of the weekend of August 27 – 28 (and some remain partially closed as of Monday morning, August 29), it appears that most of the other major economic infrastructure (ports, roads, airports, railways, refineries, utilities, etc.) related assets in the path of the storm were largely spared. Flooding remains the largest concern in the aftermath of the storm, especially in New Jersey, New York, and Vermont. If authorities take longer than now expected to repair the infrastructure, the hurricane may have a longer lasting impact on the economy in the region, and would push the United States economy closer to recession. Prior to the storm, we placed the odds of recession at around one-in-three, up from a few weeks ago, but well below the odds financial markets seem to be placing on a recession.

As previously noted, very preliminary estimates put the economic cost of Irene at between $5 and $10 billion. In terms of economic damage (adjusted for inflation), at $108 billion, Katrina (2005) was the costliest hurricane ever to hit the United States. Andrew (1992) at $45 billion was next costliest, followed by Ike (2008), Wilma (2005), Ivan (2004), Charley (2004), Hugo (1989), Rita (2004) and Agnes (1972). These storms (again in 2010 dollars) caused between $10 and $20 billion in damage. Irene may end up in the lower end of that $10 to $20 billion category in terms of economic cost, although the true cost of the storm may not be known for weeks. Three storms that took the same track as Irene — up the East Coast — and were roughly the same magnitude as Irene: Floyd (1999), Bob (1991) and Gloria (1985) were the 14th, 30th, and 30+ most costly storms in history. For perspective, the size of the United States economy is around $15 trillion dollars.

A Key Week for Economic Data

Although the week is chock full of economic data in the United States and abroad, the key reports are likely to be the ISM report on manufacturing for August (Thursday, September 1) and the August employment report (Friday, September 2).

Based on weakness in various regional ISM and Federal Reserve manufacturing sentiment surveys already released for August (Philly Fed, Empire State manufacturing, Richmond Fed, Dallas Fed), the consensus expects the August reading on the ISM to dip below 50 (to 48.5), from the 50.9 reading in July. The so-called “whisper number” among traders (who often informally have their own forecasts for key economic data and events that differs from the consensus estimate culled from economists) is probably closer to 44.0 or 45.0. Thus, expectations for ISM are quite low. A reading below 50 on the ISM has historically corresponded with contraction in the manufacturing sector, while a reading about 50 suggests an expanding manufacturing sector. The last time the ISM was below 50 was in July 2009, the first month of the current economic recovery.

It is not unusual to see the ISM to approach, and dip below, 50 in the midst of an economic expansion. The index dipped below 50 in the middle of the long 1982 – 1990 expansion and did several round trips above and below 50 in the 1991 – 2001 recovery, notably in 1995 and again in 1998. In the 2001 – 2007 expansion, the ISM dipped back toward the 50 level in 2004, before reaccelerating in 2005. More recently, we point out that manufacturing activity/output — vehicle production, industrial production, durable goods shipments and orders, manufacturing employment etc., have held up much better than measures of manufacturing sentiment like the ISM and the regional Federal Reserve manufacturing indices.

A sustained reading of 42 or below indicates recession, and the ISM did get to that level in both the 1991 and 2001 recessions. It got as low as 33.3 at the worst of the 2007 – 2009 Great Recession.

Some of the components of ISM bear close scrutiny, given the composition of the economic recovery thus far. The new orders index — which dipped below 50 in July for the first time since June 2009 is a decent leading indicator of future readings on the overall ISM. Some stabilization in the orders component near 50 would be welcome, although a sustained dip below 50 does not necessarily indicate recession.

Exports helped to lead the economy out of recession in 2009 and 2010, as signaled by the surge in the new export orders index to above 60 in 2009 and 2010, and the sustained stay above 55. The reading was 54.0 in August 2011, and although no formal consensus estimate is available for this component, the best bet is that the market is looking for this index to stay around 50 in August. The new export orders series does dip below 50 in recessions, but rarely gets below 50 during an expansion. The index did temporarily dip below 50 in 1998 due to the Asian financial crisis. One could argue that the turmoil in Europe might also push the export index lower as well.

Inventory restocking by businesses (and especially manufacturers) also played a big role in the economic recovery in 2009 and 2010. As noted in the nearby chart, the inventory component of ISM spends most of its time below 50, and dips well below 40 during recessions. It got as low as 31.3 in June 2009, the final month of the 2007-2009 Great Recession. The inventory component of ISM has spent much of the past two years above 50 as businesses have restocked inventories to meet increased final demand. It dipped to 49.3 in August 2011 however. A reading above 43 on this component of ISM suggests that the economy is still expanding.

The other key report due this week is of course the August employment report. The employment report is actually two reports in one. One part of the report surveys 60,000 households on their employment status, generating the widely cited unemployment rate figure, calculated as the number of people unemployed and looking for work as a percentage of all the people in the labor force. The other side of the report surveys 140,000 businesses, and generates the number of workers on payrolls, their wage rates, hours worked etc. Both surveys have huge nationwide sample sizes-far greater than the survey sizes (typically 1000 people) used in polling for national political races — and have been conducted for more than half a century. Although jobs are a lagging indicator of the economy (and the economy itself lags financial markets), the monthly jobs report is perceived by markets and the media as the most important economic report of the month.

The market is looking for the economy to create 103,000 private sector jobs in August, a deceleration from the 154,000 jobs created in July. As is the case with the “whisper number” for the August ISM report, at between zero and 25,000 jobs, the whisper number for the private sector job count is probably a lot lower than the published consensus. So, as is the case with the August ISM report, expectations are quite low for the employment report. State and local governments, which have shed nearly 600,000 jobs over the past three years, are expected to shed another 25,000 in August, so the overall economy (private sector and government) is expected to have added only 75,000 jobs in August. The whisper number here is well below zero, again suggesting that even an outright decline in overall jobs between July and August is somewhat priced in.

Weather, strikes, and other “one time” events often impact the monthly jobs report, and the August report is no exception. A strike at Verizon that impacted 45,000 workers will negatively impact the August job count, although the market should take this into account. The supply chain disruptions caused by the Japanese earthquake and the early (June instead of July) shutdown of auto plants for summer vacations may also wreak havoc with the August job count. Most importantly however, the dour mood that descended on the country in late July and early August as the debt ceiling debate raged, followed by a further dip in consumer, business and market confidence after S&P downgraded the U.S. debt rating on August 5 almost certainly curtailed hiring in the month. In addition, tightening financial market conditions (and very elevated readings on market volatility) also likely weighed on businesses decisions to hire in August.

Our Take on Fed Chairman Bernanke’s Jackson Hole Speech

Fed Chairman Bernanke’s speech in Jackson Hole on Friday, August 26 struck just the right tone for investors. As we expected, Fed Chairman Ben Bernanke did not hint at any new, immediate actions by the FOMC in the speech. Instead, Bernanke sounded relatively optimistic about the economy, especially in the long-term. In the short-term, Bernanke did note that the upcoming FOMC meeting (mid-September) has been changed to a two day meeting from a one day meeting. In our view, the extra day would provide the FOMC the additional time to:

A.      Further refine the policies it has been discussing: extending the maturity of its Treasury holdings, lowering the rate it pays on excess reserves, or buying more Treasuries (QE3).

B.       Come up with a completely different policy approach to address slow growth in the U.S. economy.

Bernanke also noted that the sovereign debt issues in Europe, as well as the fiscal situation in the United States were at the top of the list of FOMC concerns. Bernanke was unusually blunt in his criticism of Congress (his bosses) and its ability to make prudent fiscal decisions. Bernanke also reiterated his view that Congress should take into account the “fragility” of the economy when considering additional spending cuts as part of the debate to further address the long term budget issues faced by the United States.

Bernanke, a Republican first appointed by President George W. Bush, noted, “Fortunately, the two goals of achieving fiscal sustainability — which is the result of responsible policies set in place for the longer term — and avoiding the creation of fiscal headwinds for the current recovery are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the longer term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives.”

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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.

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.

Stock investing involves risk including loss of principal.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

The Philadelphia Fed Survey is a business outlook survey used to construct an index that tracks manufacturing conditions in the Philadelphia Federal Reserve district. The Philadelphia Fed survey is an indicator of trends in the manufacturing sector, and is correlated with the Institute for Supply Management (ISM) manufacturing index, as well as the industrial production index.

Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York.

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 #1-003249 (Exp. 08/12)

Weekly Market Commentary

Summer Roller Coaster

Summer is a time when many Americans seek out amusement parks for the thrills of riding a roller coaster. The climbs and drops at high speed deliver an exciting mix of fear and exhilaration. But knowing the extent of the highs and lows and when it is going to be over play a crucial role in the fun of riding a metal roller coaster. Riding a market roller coaster offers no such assurances and is no fun at all.

To say last week was volatile for the markets would be a major understatement. The stock market posted one of its most volatile weeks ever with swings of greater than 4% during each of the first four days of the week, changing direction with each day. This pattern of performance has never before been seen in the 83-year history of the S&P 500 index. By Friday, stock market turbulence slowed. For the week, the S&P 500 was down 1.6% adding to the losses that now total 13% since the recent peak on July 7.

While the U.S. debt downgrade in the week before last grabbed a lot of attention and added to the lingering pessimism heading into last week, one of the primary drivers of last week’s volatility was that eurozone leaders, while making some successful efforts, have not gone far enough to resolve the debt problems in the eurozone. Investors feared a downgrade to France, and another banking crisis stemming from some French banks noted by Moody’s, as at risk of a downgrade due to their exposure to troubled debt. Another key driver was the better-than-expected economic data on retail sales and the labor market along with the Fed confirming they intend to keep short-term interest rates low until mid-2013. This optimism that the U.S. economic soft spot was firming vied with the concern that the pace of economic growth in the United States may soften further as stimulus begins to fade.

While last week’s volatility is unprecedented, we can take some comfort that the overall moves and sentiment in the market this summer are familiar; they echo those of last summer.

·         At the low point of last week, the S&P 500 was down 17%, similar to last summer’s volatile 16% peak-to-trough decline.

·         The 10-year Treasury note yield has fallen 1.6 percentage points from the high of the year, similar to last summer’s 1.6 percentage point decline from the high of the year.

·         The drivers of the decline are similar to last summer, as well. Last year, Europe’s debt problems were a main cause of the market’s decline, as was an economic soft spot in the United States as stimulus began to fade when the Federal Reserve ended the QE1 bond buying program and state and local governments were cutting back on spending.

So, maybe we have been on this market roller coaster before, and, if so, we might be near the end. Last year, the roller coaster did not leave the track and the summer plunge turned into a steep climb as stock and bond yields rose to new post-recession highs. We continue to believe this summer’s drop will end with similar results and ultimately produce a modest single-digit gain for the S&P 500 in 2011. We believe the fundamental underpinnings of solid corporate earnings growth (up 19% year-over-year in the second quarter), low valuations (the price-to-earnings ratio fell to levels not seen since 1989 during the lows of last week), and firming economic data (as Japan’s economy rebounds from recession) will combine to support stocks, high-yield bonds, and other business cycle-sensitive investments.

However, there are factors we are watching to determine if this volatility is instead a precursor to a deeper and longer lasting bear market. In the next few weeks there are a number of potentially market-moving events that may continue some of the volatility that was so pronounced last week.

·         With all the attention on Europe’s sovereign debt problems, this week’s meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy will garner much attention. The market wants to know how much larger the European bailout fund is going to be and under what conditions it may be used, although this is unlikely to be determined for a number of weeks.

·         A lot of retailers report second quarter earnings this week. But the solid results will be tempered by an outlook clouded by the sharp decline in confidence seen in the widely-watched University of Michigan consumer sentiment index falling all the way back to the levels during the financial crisis. The question for markets is whether the stock market’s violent sell off has become such a negative for consumer and business confidence that it will impact the economy and profits.

·         In 2010, the Fed’s annual Jackson Hole meeting at the end of August hinted that QE2 may be coming and got the markets to acknowledge improving economic and profit data and rebound. The Jackson Hole meeting at the end of the month will be closely watched for indications of how the Fed may respond to further economic weakness. In the meantime, this week Dallas Fed President Richard Fisher will speak. Fisher is one of three Fed officials who dissented to the Fed’s statement that interest rates would remain low through mid-2013 and his comments may add to volatility.

·         U.S. economic growth has started to show signs of improving. This can be seen in a number of economic readings including the fall in initial jobless claims to a four-month low of 395,000 in the past week, retail sales running 4 – 5% above a year-ago levels, and signs that industrial production has increased. In the coming week, gloomy housing-related data is on tap, but stronger readings on manufacturing in the Philadelphia Fed survey along with leading economic indicators may provide positive data points.

Although we expect volatility to continue, we foresee a more muted level than last week’s market roller coaster ride and a climb over the months ahead. In general, we advise investors to do what they normally do on a roller coaster: hang on tightly, grit your teeth, scream if you need to, but do not jump off.

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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.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

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

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

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

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate.

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 #753038 (Exp. 08/12)

Weekly Economic Commentary

Midsummer Madness

As if the debt ceiling debate was not enough madness for financial market participants to endure, this week’s economic and policy calendar is full of events that could drive markets mad. The week kicked off with the release of the Chinese PMI data for July, and will end with the July jobs report. In between, data on vehicle sales, personal income and consumer spending, factory orders, chain store sales, and layoff announcements for June and July will all vie for the market’s attention. This is the unofficial “quiet week” for Federal Reserve (Fed) officials, ahead of next week’s Federal Open Market Committee (FOMC) meeting. Overseas, the Bank of England, the European Central Bank, the Bank of Japan and the Reserve Bank of Australia meet to set rates. None of these central banks are expected to raise rates. Outside of the central bank activity, there are very few key overseas economic reports due this week. The Chinese data for July is set to be released next week, August 7 – 13.

Although the ink is not dry yet, the deal to raise the nation’s debt ceiling will help to lift some of the uncertainty that has hampered economic activity over the past few months. Of course, virtually all of the data due out this week references the period (June or July) during which the debt ceiling debate dominated the headlines. Thus, it may not be until mid-August that we get a “clean” set of data on the economy, free of any distortion from the debt ceiling debate.

Until then, however, markets have plenty to digest. As this report was being prepared for publication, the Institute of Supply Management’s (ISM) report on manufacturing for July was released. The report fell far short of expectations, was below the low end of the range of economists’ estimates, but most importantly suggested that manufacturing activity in July slowed to near stall speed. The closely watched report saw marked deceleration across all of its key components (new orders, production, and employment), and the drop in the new orders index below 50—a reading below 50 in the ISM report indicates contraction in the index or component—was particularly worrisome. July 2011 marked the first time in two years that the new orders index was below 50. In addition, the 50.9 reading on the overall ISM index for July was the lowest since the first month of the recovery (July 2009).

While it is not unusual to see the ISM slide back toward 50 at this point in the economic cycle, it is clear that the slowdown in China, the ongoing recovery in the global supply chain from the earthquake and tsunami in Japan, the turmoil in Europe and the uncertainty surrounding the debt ceiling all impacted manufacturing activity in July. A slower-than-expected ramp up in auto production in July also likely hurt manufacturers. Still, booming exports (50% of U.S. exports head to fast growing emerging market economies), a weak dollar, low financing rates, and a low inventory-to-sales ratio all continue to support the manufacturing sector. The key for markets now is when do the negative factors fade and allow the positives to drive the manufacturing sector higher.

The other key report this week is the July jobs report. The report is due out on Friday, August 5. The market is looking for a modest acceleration in private sector job creation in July and for the unemployment rate to remain stable at a still-elevated 9.2%. The consensus forecast in private sector jobs is for a gain of 120,000 following the disappointing 57,000 gain in June. The job count totals are derived from a survey of businesses. As previously noted, the unemployment rate—derived from a survey of households about their employment status—is expected to remain at 9.2%, unchanged from June’s 9.2% reading, but below the recent peak of over 10.0% hit in late 2009.

We continue to expect further losses in state and local government employment in July, even after this sector of the economy has shed nearly 600,000 jobs over the past three years. Teacher layoffs could be a big swing factor in July (most state and local government fiscal years begin in July), and the auto sector could see some movement as well, given the unusually early auto plant summer shutdowns this year, which occurred in June rather than July, as is typically the case.

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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.

Stock investing involves risk including loss of principal.

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

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 #750422(Exp. 08/12)

Weekly Economic Commentary

What’s The Consensus?

This week (July 25 – 29), the global economic and policy calendar really heats up after a relatively quiet week last week. Of course, until a resolution on raising the debt ceiling in the United States is reached (the deadline is August 2), market participants will be focused on Washington rather than on the economic data. In addition, another 175 S&P 500 companies will report their second quarter results this week, and these earnings reports may also divert attention away from Washington, at least temporarily.

In the United States, the Federal Reserve's (Fed) Beige Book (a qualitative assessment of economic and business conditions in each of the 12 Fed districts) and the second quarter report on gross domestic product (GDP) will get the most attention from the financial media, but regional manufacturing reports for July, the June durable goods report, and, of course, jobless claims could also be market movers. Overseas, India's central bank meets to set policy, as does the Reserve Bank of New Zealand. Many emerging market central banks, as well as central banks of developed economies with heavy exposure to commodities, are still raising rates to combat booming growth and accelerating inflation. Although China may hike rates again at any time, and Brazil raised rates for the fifth time since early 2010 last week, many overseas central banks are likely much closer to the end of their tightening cycles than they were in the early part of 2011.

It is expected to be a quiet week on the economic data front in China, with the next key data point being the release of the July purchasing managers index on July 31. However, a number of key reports on Japan's economy (industrial production, retail sales, construction) covering June will be released this week that should help markets gauge the pace of the recovery from the earthquake and tsunami. As noted in the section below, the Japanese earthquake and tsunami temporarily dampened economic activity in the United States in the second quarter of 2011, and the market expects that the reversal of these temporary factors will lift growth in the third quarter of 2011. Company specific data from Japan’s automakers (released over the weekend of July 23 – 24) suggest that there was rapid improvement in the auto supply chain in June, which bodes well for a strong reading on June industrial production in Japan, which is due out on Friday, July 29.

At the start of 2011, the consensus (as measured by a survey of 65 economists by Bloomberg news) forecast for real GDP growth in the United States in 2011 was for growth of 3.1%. Today, that consensus forecast stands at just 2.5%. Our view today, as it was at the beginning of the year, is that the United States economy will grow between 2.5 and 3.0% in 2011. Note that real GDP growth has averaged 2.8% since 1980. Thus, at the start of the year, we had a below consensus view of GDP growth in 2011, and today, our view is roughly in line with consensus. Interestingly, while we stuck to our view over the first six months of 2011, the consensus forecast rose (to as high as 3.2% by February 2011), and fell (to the aforementioned 2.5%) this year.

The consensus forecast for growth in 2012 in the United States stands at 3.0%, versus 3.2% in January 2011. By comparison, the Fed is expecting GDP growth to average 2.8% in 2011 and 3.5% in 2012. It is notable that both Fed forecasts are above the consensus. In our view, the Fed is more likely to lower than raise its forecast for economic growth in the coming months. The next Fed forecast is set to be released in November 2011.

Turning now to the outlook for global growth, we find that the consensus is looking for 4.0% GDP growth in 2011, only slightly below the 4.2% growth the consensus was expecting in January 2011. The key driver here remains growth in emerging market economies, which are expected to experience 6.6% growth in 2011 and 6.4% in 2012, roughly triple the forecast for the developed world (2.2% in 2011 and 2.6% in 2012). Strong GDP growth in emerging market economies — despite the many rate hikes implemented by most emerging market central banks over the past 18 months — continues to drive not only global GDP growth, but also U.S. exports and U.S. corporate profits. Merchandise trade data compiled by the United States Department of Commerce shows that around 50% of U.S. exports go to emerging market economies.

Taking a shorter-term view, the consensus estimate for U.S. economic growth in the second quarter of 2011 is for a 1.8% quarter-over-quarter gain in real GDP after a 1.9% quarter-over-quarter gain in the first quarter of 2011. The second quarter GDP data is due out on Friday, July 29, 2011. As is typically the case this time of year, the government agency that compiles the GDP data, the Bureau of Economic Analysis (BEA), will also release revised data on GDP and its components (consumer spending, exports, government spending, etc.) back to 2008. Some components will be revised back to early 2003. While the revisions to prior data won’t change the investing landscape- after all, markets are forward looking, the data will be pored over by pundits, the media and politicians looking for ways to assign blame (or take credit) for the Great Recession and the recovery over the past two years.

Several temporary factors (severe weather, floods, and Japanese earthquake-related supply chain disruptions, high consumer energy prices) likely curtailed growth in the second quarter. While we expect these weights on growth to lift in the second half of the year and foster more rapid growth, several factors that weighed on growth in the first half of 2011 will continue to weigh upon growth in the second half of 2011 and beyond. Among these longer term issues are:

·         Ongoing layoffs in state and local governments

·         A moribund residential and commercial real estate market

·         A tepid labor market

·         Sagging business and consumer confidence

Until these longer term weights on growth are resolved, the prospects for economic growth in the United States are muted. In short, while the U.S. economy has experienced a relatively modest recovery — roughly in line with the recoveries from the mild recessions in the early 1990s and early 2000s — when compared to the severity of the Great Recession, the recovery does not “feel” like a real recovery. It is not likely, unfortunately, that the second quarter GDP report will change that view.

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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 opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

An emerging market is a nation that is progressing toward becoming advanced, as shown by some liquidity in local debt and equity markets and the existence of some form of market exchange and regulatory body.

Developed economies are typically described as a country with a relatively high level of economic growth and security. Some of the most common criteria for evaluating a country's degree of development are per capita income or gross domestic product (GDP), level of industrialization, general standard of living and the amount of widespread infrastructure. Increasingly other non-economic factors are included in evaluating an economy or country's degree of development, such as the Human Development Index (HDI) which reflects relative degrees of education, literacy and health.

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

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #748665 (Exp. 07/12)

Weekly Economic Commentary

What’s Missing?

Economics and central bank policy will most likely play second fiddle to the ongoing debt ceiling debate in the United States, the fiscal woes in Europe, and the heart of the second quarter earnings reporting season for S&P 500 companies. Housing data (homebuilder sentiment, housing starts, building permits, existing and pending home sales) will dominate the week, but the key report of the week may very well be the July reading of the Philadelphia Fed manufacturing index. Overseas, data on June consumer spending in Japan and July manufacturing in China will draw the most attention from market participants. It is a relatively quiet week for the Federal Reserve, with only a few speakers on the docket. Meanwhile the central banks in Brazil, Canada, India and South Africa meet this week, with only Brazil poised to raise rates. Indeed, many overseas central banks may now be much closer to the end of their tightening cycles than they were in the early part of 2011.

The Great Recession ended over two years ago and yet, economic growth remains sluggish, the labor market is still moribund, and consumer confidence has barely budged since June of 2009. So what’s missing? The answer of course, is in the question: The recovery is missing growth, and jobs and confidence, but why? The section below briefly examines how we got here (i.e. two years into the recovery) and what makes this recovery “different” from prior economic recoveries. Our answers may surprise you.

In testimony to Congress last week (July 11 – 15), Federal Reserve Chairman Ben Bernanke noted that although the economy was growing, and expected to continue to grow in the coming quarters, headwinds to growth were prevalent. The headwinds noted by Bernanke included the following:

·         Slow growth in consumer spending, even after accounting for the effects of higher food and energy prices

·         The continuing depressed condition of the housing sector

·         Still-limited access to credit for some households and small businesses

·         Fiscal tightening at all levels of government.

In prior public appearances over the past few months, Bernanke, in addition to mentioning temporary factors—the earthquake and Tsunami in Japan and its impact on the global supply chains, severe weather and higher energy prices—has cited “weakness in the financial sector” and “balance sheet and deleveraging issues” as longer-term issues that may be impacting the recovery.

While consumers have “hung in there” as we expected at the beginning of 2011 (see 2011 Outlook publication), the slow labor market and ongoing repair of consumer balance sheets (i.e. consumers are paying down debt and saving, along with doing a little spending) has clearly limited the consumers’ influence on the recovery. Through the first seven quarters of the recovery (the second quarter of 2009 through the first quarter of 2011), consumer spending’s contribution to overall real domestic product (GDP) growth has been 11 percentage points, which sounds great considering that consumer spending accounts for two-thirds of GDP. But the consumer’s contribution to GDP growth in this recovery pales when compared to the recoveries following the mild 1990 – 91 and 2001 recessions, and is not even in the same league with the performance of the consumer following the severe 1973 – 75 and 1981 – 82 recessions.

Contribution to GDP Growth Over the First Seven Quarters of Recovery

(In Percentage Points of GDP Growth)

                             Recovery             Recovery            Recovery              Recovery             Recovery

                             From Great           From 2001           From 1990-91       From 1981-82       From 1973-75

                             Recession            Recession           Recession            Recession            Recession

Consumer              11.0                        13.3                        15.4                        24.7                        18.9

Spending

Housing                 -0.3                         3.0                          3.0                          7.3                          6.2

State & Local        -1.5                          0.8                          1.4                          2.2                          0.2

Government

Spending

Source: Haver 07/18/11

On average, during the first seven quarters of the economic recovery following the two mild recessions (1990 – 91 and 2001), consumer spending contributed around 14 percentage points to growth. In the similar period following the severe recessions (1973 – 75 and 1981 – 82), consumer spending contributed around 22 percentage points to growth. Tepid real income growth which, in turn, is a result of tepid job growth, takes most of the blame here during the current recovery, along with the aforementioned balance sheet repair. Looking ahead, the consumer-related headwinds are likely to persist, keeping a lid on spending and consumer confidence. Our forecast remains that the consumer will continue to “hang in there” but will not be the driver of economic growth it was during similar stages of prior recoveries.

Turning now to housing, over the first seven quarters of the current recovery, housing has been a net drag on overall GDP growth, marking the first time in the post-WWII era that housing has not made a contribution to overall economic growth this far into a recovery. On average, during the economic recoveries following mild recessions, housing contributed three percentage points to GDP growth, and that figure is closer to seven percentage points in recoveries from severe recessions. As one might expect, the weakness in housing in this recovery has had a major impact on employment in the construction industry.

Construction employment has declined at a 3.7% annualized pace since June 2009, while in the recoveries from the severe recessions in the 70s and 80s, construction employment at this point in the cycle had increased by 4.0%. Looking ahead, housing is likely to continue to bounce along the bottom, not getting any worse, but not getting any better either.

A large overhang of unsold existing homes—officially around four million, but there are another two million or so existing homes in the so-called “shadow inventory” (bank-owned houses mired in the foreclosure pipeline) —continues to be the largest impediment to an improved housing market, although tighter lending standards (relative to the 2002 – 2006 boom years) and a tepid labor market are also helping to restrain housing. On the plus side, housing affordability (the ability of a family with the median income to afford the payment on the median priced house) is at an all-time high, and banks are becoming more willing to lend in this sector. There is a ton of housing-related data due out this week for June and July that the market will continue to monitor to assess the health of this small, but important segment of the economy.

Since WWII, state and local government spending and employment has been a reliable source of economic growth at virtually all points in the business cycle. But as noted last week by Fed Chairman Bernanke (and often by LPL Financial Research in recent months) state and local governments have been an unprecedented impediment to growth and employment in this recovery.

For the first time since WWII, state and local government spending has not added to growth over the first seven quarters of an economic recovery. In fact, state and local government spending has subtracted one and a half percentage points from growth over the past two years, and state and local government employment has contracted at a 1.5% annualized rate over that time. In contrast, state and local government spending has added around one full percentage point to growth over the first seven quarters of the prior four economic recoveries, while adding jobs at a 1.5% annualized rate. Looking ahead, the best case would be that state and local government’s contribution to GDP growth stabilizes, and that the job losses seen in the sector continue at the current pace (around 15,000 to 20,000 per month) for the foreseeable future, as states and municipalities of all sizes continue to struggle with too much spending and not enough revenue.

Of course, the lack of contribution from state and local government and housing, along with the historically low contribution from the consumer at this stage of the recovery, has left the heaving lifting to the export sector, inventory accumulation, business spending and, of course, federal government spending. Three of the four of the drivers of growth thus far in the recovery—business capital spending, exports, and inventory accumulation—appear likely to continue, while federal government spending will likely fade as budget cuts at the federal level loom on the horizon.

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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.

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.

Stock investing involves risk including loss of principal.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

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

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is notan 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 #746685 (Exp. 07/12)

Weekly Economic Commentary

A Confidence Game

Data on inflation, the consumer, and the manufacturing sector in the United States all will compete for attention this week with the latest round of debt ceiling talks in Washington, the Chinese economic data for June, and the start of the Q2 2011 earnings reporting season for most S&P 500 companies. The Federal Reserve (Fed) will also join the mix this week, as they release the minutes of the June 21 – 22 Federal Open Market Committee (FOMC) meeting and Fed Chairman Ben Bernanke will deliver his semiannual Monetary Policy testimony to Congress. More concerns over the fiscal health of Europe (the latest flare-up involves Italy) will also be on the market’s radar this week, as will central bank meetings in Japan, Indonesia, South Korea, Thailand and Chile. Finally, last week’s disappointingly weak June jobs report is likely to continue to reverberate through the market, as participants continue to wait for the long awaited “bounce” in economic data, after an economically difficult second quarter, impacted by weather, natural disasters at home, and, of course, the Japanese earthquake.

Bernanke on the Hot Seat in Congress This Week

In years past, a Fed chairman appearance before the House Financial Services Committee to deliver the Congressionally-mandated semiannual monetary policy testimony (formerly known as the Humphrey Hawkins testimony) would be met with a great deal of anticipation and hype from the market, and especially the financial media. This year, however, the approach of current Fed Chairman Ben Bernanke’s testimony has not generated as much buzz. The reason may be that while in years past the Humphrey Hawkins testimony was one of the only opportunities anyone outside the Fed had a chance to ask the Fed Chairman a question, or to allow the Fed Chairman to elaborate on various issues. These days, the Fed is more transparent than ever. In just the past two and a half years, Bernanke has appeared on the CBS news magazine 60 Minutes twice, held several “town hall” meetings, held a limited access press conference (where questions were submitted in advance) and, more recently, has conducted two full-scale press conferences, where reporters can ask Bernanke whatever they want.

Still, in the wake of the weak June jobs report, and in the midst of the debt ceiling debate, Bernanke’s comments will be closely watched by market participants. It is quite likely that Fed Chairman Bernanke will be grilled by Congress on the economy, and especially the labor market, and what, if anything, the Fed can do to create more jobs. Bernanke’s response is likely to be similar to the responses given in his recent press conferences (April 27 and June 22), in which he described the economy as frustratingly slow and uneven. In addition, members of Congress are likely to question Bernanke about the ongoing debt ceiling debate. In response, Bernanke is likely to gently remind the members of the House Financial Services committee (who are essentially his boss) that it is Congress’ jobs to balance the budget, while it is the Fed’s job to run monetary policy.

In recent public appearances, Bernanke has suggested that the budget negotiations focus on the long term, and that it would be very desirable to take “strong action” to lower the budget deficit over the long term. However, Bernanke has also made it clear that “it would be best not to have sudden and sharp fiscal consolidation in the very near term” as it does not do much for the long-run budget situation and is "just a negative for growth”. Finally, Bernanke is likely to be asked under what conditions the Fed would consider doing more to help the economy, i.e. more quantitative easing (QE3).

When asked about the possibility of QE3 at his last press conference on June 22, Bernanke downplayed the idea, noting that the risk of deflation had waned and that economic activity had picked up since the summer of 2010 when the Fed first hinted at QE2. He did leave the door open slightly saying that the Fed would “continue to monitor’ economic activity and “act as needed.” Our view here remains that the hurdle for the Fed to embark on QE3 remains very high.

June Jobs Report Jolts Markets

The June jobs report was a major disappointment to markets, and to those market participants (including ourselves) that had been saying that the economic “soft spot” had ended and that the economy would reaccelerate back to a slightly more robust growth path in the second half of the year. Even after seeing the report, we maintain the view that the private sector economy can create between 200,000 and 250,000 jobs per month in the next few years, which would be enough to push the unemployment rate down slightly, and keep the consumer “hanging in there” as a support to modest growth in the economy. Our forecast for the United States economy and the labor market in particular, continues to be below the consensus, although the consensus has moved down considerably since the beginning of 2011.

The June nonfarm payroll jobs report (which is actually two reports in one) revealed that the private sector economy created just 57,000 jobs in June, the fewest in any month since June 2010. Making matters worse, the job count in the prior two months was revised downward by 44,000. Over the past two months (May and June 2011) the economy added an average of just 65,000 jobs per month, after adding close to 225,000 per month in the early part of 2011. The data that generates the monthly job count is based on a survey of 140,000 businesses across the United States.

The unemployment rate, which is calculated using data culled by surveying 60,000 households about their employment status, rose 0.1% to 9.2% in June, the highest reading since December 2010. The sample sizes of both the establishment survey (140,000 businesses) and household survey (60,000 households) are extraordinarily large sample sizes for a national survey. For perspective, national polling on presidential elections only uses around 1,000 respondents.

Other than sizeable gains in retail, transportation and leisure, and hospitality employment in June, there were few bright spots in the June employment report. State and local government payrolls fell by another 25,000 and have now dropped in ten of the last eleven months. Since August 2008, state and local government employment (which at just over 19 million, accounts for around 15% of all employment in the United States) has decreased by 577,000, as states, counties, cities and towns across the country struggle in the aftermath of the Great Recession.

Despite the disappointment in June, conditions are favorable for job creation in the months ahead, although significant obstacles to hiring remain, especially in the small business community. Banks are lending again, and terms of these loans are getting more favorable, although they are not yet back to pre-2007 levels. Business capital spending is booming, corporate profits are approaching all-time record levels, and companies have plenty of cash. Near record-low market interest rates have allowed many larger corporations to reduce costs even more by refinancing existing debt. In addition, overseas growth (50% of U.S. exports go to fast-growing emerging markets) is still running at more than three times growth in the United States, even as China continues to slow its economy.

In our view, the biggest impediment to hiring may be confidence. Businesses must have confidence that the now two-year old recovery is firmly in place before committing to expanding their workforce. In addition, businesses need to be confident that our leaders in Washington and at the state and local level will tackle the debt and deficit problems, while fostering a hiring- friendly regulatory environment. On the flip side, in order to lend to businesses confidently, banks need to have certainty around their regulatory backdrop, while at the same time having confidence that the economy is strong enough to support lending.

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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.

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 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 #744964 (Exp. 07/12)