Weekly Economic Commentary

Moving to the Muddle

The ongoing political and financial turmoil in Europe is likely to draw most of the market’s attention this week. Against that somewhat unsettling backdrop, market participants will digest a relatively busy slate of U.S. economic data for October and November, as well as a full docket of appearances by Federal Reserve (Fed) officials.

With only a scattering of earnings reports and guidance for the third quarter of 2011 remaining, this week’s full slate of economic reports and heavy schedule of Fed speakers will compete with the economic and fiscal turmoil in Europe for the market’s attention. Participants continue to assess what impact a potential recession in Europe and slowdown in emerging markets will have on the United States economy, and when that impact is likely to be felt.

The European summit of late October 2011 produced measures that were clearly a positive and removed the extreme risks in our view. However, details will be slowly forthcoming in the months ahead and implementation risks remain. Delays or disruptions could undermine market confidence and lead to bouts of safe-haven buying of Treasuries. Furthermore, should European economic growth be weaker than expected, investors may deem recently agreed upon safeguards as insufficient and peripheral European government bond weakness may create safe-haven buying of Treasuries.

Looking ahead, developments in Europe will remain a major market driver in the weeks and months ahead, and well into 2012. We believe a financial crisis and accompanying deep global recession erupting from the European debt problems has a small, but not insignificant, chance of taking place. We will continue to monitor the developments and signs of stress in the European banking and sovereign funding markets. But, as Europe muddles along, we believe investors are better served to watch the real-time indicators of economic performance as a guide to market behavior.

This week is a very busy week for U.S. economic data, including reports on:

·         Housing: November homebuilders sentiment, October housing starts, third quarter mortgage delinquencies and foreclosures

·         Inflation: consumer price index (CPI) and producer price index (PPI) for October

·         Manufacturing: industrial production for October, Philly Fed and Empire State Manufacturing indices for November

·         The consumer: October retail sales and weekly retail sales for the week ending November 12

In addition, the weekly reading in initial claims for unemployment insurance will be closely watched as this data set in recent weeks has suggested some positive momentum in the labor market.

In addition to the data, there are a number of Fed speakers on tap this week, although Fed Chairman Bernanke is not among them. This week’s Fed speakers lean a bit toward the “dovish” side (Fed officials who favor the full employment side of the Fed’s dual mandate of low inflation and full employment), although some notable “hawks” (Fed officials who favor the low inflation side of the Fed’s dual mandate) are on the schedule as well. We will continue to watch the “center of gravity” at the Fed - Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley - for any shift in tone. Of the three, only Dudley is slated to speak this week. The Fed will release the minutes of the November 1 – 2 Federal Open Market Committee (FOMC) meeting on November 22, and the next Beige Book, a qualitative assessment of business and financial conditions in each of the 12 regional Fed districts, is due out on November 30. The next FOMC meeting is December 13.

We continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the market’s expectations (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecasts for economic growth and the unemployment rate remain more optimistic than the market’s.

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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.

Core CPI is a subset of the total Consumer Price Index (CPI) that excludes the highly volatile food and energy prices. It is released by the Bureau of Labor Statistics around the middle of each month. Compare to Personal Consumption Expenditures (PCE); Core PPI; Producer Price Index (PPI).

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 #1-022964 (Exp. 11/12)

Weekly Economic Commentary

Can The Labor Market JOLT the Economy?

The upcoming week (November 7 – 11) is heavy on speakers from the Federal Reserve (Fed) and relatively light on U.S. economic reports, providing markets ample time to reflect on the October employment report and to focus on the deliberation of the congressional super-committee and the latest news in Europe. The next round of Chinese economic data for October is due out this week, as the market continues to debate the hard landing/soft landing issue in China. We will continue to watch the “center of gravity” at the Fed — Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley — for any shift in tone.

Aside from the regular weekly reports on retail sales and initial claims for unemployment insurance, none of this week’s batch of economic data in the United States is likely to be market moving. There are a number of Fed speakers this week, as market participants mull over last week’s Federal Open Market Committee (FOMC) meeting as well as the press conference held by Fed Chairman Bernanke. This week’s speakers range from very hawkish (Fed officials known to favor the low inflation side of the Fed’s dual mandate from Congress) to very dovish (Fed officials known to favor the full employment side of the dual mandate). The hawks slated to speak this week are Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota. The doves on the docket this week are San Francisco Fed President John Williams, Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren.

It is likely that the hawks will say that the Fed is putting too much monetary stimulus in the system, and equally as likely that the doves will say the Fed needs to do even more to support the economy. While the media will likely focus on the extremes, we will continue to watch the Fed’s “center of gravity” — Bernanke, Yellen and Dudley — for any shift in tone at the Fed. Two of the three (Bernanke and Yellen) are set to make public appearances this week. We continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the market’s expectations (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecast for economic growth and the unemployment rate remains more optimistic than the market’s. The next FOMC meeting is in mid-December.

This week’s economic calendar is filled mainly with second-tier reports on the economy and with little in the way of corporate earnings news on tap this week, markets are likely to continue to focus on Europe, the super-committee’s deliberations on the federal budget and on the full docket of Chinese economic reports for October.

Unlike most developed markets (and most emerging markets), where the economic data calendar is set well in advance, the Chinese economic data calendar is relatively flexible. Reports on Chinese industrial production, retail sales, exports and imports, and perhaps money supply and new loans are likely to be released this week, as market participants continue to debate whether or not Chinese authorities can guide China’s economy, the world’s second largest, to a soft landing. Although fears continue to swirl in the marketplace about a so-called “hard landing” — a sharp and unwanted slowdown in economic growth in China to around 5 or 6% from the current growth rate around 9% — our view remains that China can achieve soft-landing growth of 7 to 8%, and that Chinese authorities are close to taking steps to stimulate the Chinese economy. In our view, fears of a hard landing in China (and related issues like China’s banking system and property market) are waiting in the wings to replace Europe and the U.S. fiscal situation as the financial market’s concern du jour.

The JOLTS Data and the Labor Market

One report due out this week that we like to watch, but one the market seems to ignore, is the job openings and labor turnover (JOLTS) report. The JOLTS report does not get a lot of attention, mainly because it is dated (the report due this week is for September), and the market already has plenty of information on the labor market in October. However, the JOLTS data provides more insight into the inner workings of the labor market than the monthly employment report does.

JOLTS provides data on:

·         The number of job openings (there were just over three million open jobs at the end of August)

·         The number of new hires in a given month (four million positions were filled in August)

·         Job separations (just under four million people left jobs in August)

The data is conveniently broken down by industry group and by region as well. On the surface, the data reveals just how dynamic the U.S. labor market is, demonstrating how the economy creates (and destroys) tens of millions of jobs a year. Digging a little deeper, one of our favorite components of the JOLTS data can be found within the data on job separations.

People are separated from their jobs either voluntarily (they retire or quit to take another job) or involuntarily (they are laid off or fired from their jobs). As noted above, just under four million positions were eliminated in August. About half of these (two million) came as a result of people leaving their current positions voluntarily. While not quite back to “normal” — during the mid-2000s economic expansion in the United States, roughly 55% of job separations were the result of workers voluntarily quitting their jobs — the percentage of job quitters in August was far above the recession lows. In early 2009, during the worst of the Great Recession, only 37% of separations were voluntary, suggesting that layoffs and downsizing accounted for nearly two-thirds of job separations. The steady climb higher in recent months of the number of job separations that are voluntary suggests that the labor market is healing, albeit slowly, as individuals are becoming more and more confident in the labor market. After all, you would not likely leave a job in today’s environment unless another job was waiting for you.

As noted in last week’s employment report for October, the labor market is healing, but still has a long way to go. The data further undercuts the notion that the economy is in, or about to enter, a recession, although it does suggest only sluggish growth (2.0 to 2.5% GDP growth). The economy created 80,000 jobs in the month (expectations were for an increase of 125,000), but the job count in the prior two months was revised up by a combined 102,000, taking some of the sting out of the below-consensus October reading. The private sector created 104,000 jobs in October, as state and local governments shed another 22,000 jobs.

Over the past three months, the private sector has added an average of 122,000 jobs per month; good, but not great. The private sector economy shed 8.8 million jobs between December 2007 and February 2010, but has added just 2.8 million of those jobs back since then, creating jobs in each of the past 20 months in the process. The increase in the number of private sector jobs over the past 20 months is in line with the pace of job creation seen during recoveries from the last two recessions (1990 – 91 and 2001). The payroll job count data is culled from a survey of 440,000 business establishments across the country.

The unemployment rate, calculated from a survey of 60,000 households across the country — a huge sample size for a national survey given that most polling on national elections survey only a few thousand people at most — dipped 0.1% to 9.0% in October. The unemployment rate is calculated by dividing the number of unemployed persons (about 14 million) by the total number of people at work or looking for work (about 154 million). The details of this household survey were solid, as the survey's count of employment increased by 277,000, the third consecutive sizeable gain (275,000+). The number of persons in the labor force (at work or looking for work) increased for the third consecutive month as well.

On balance, the labor market remains stuck in neutral. The economy is growing just enough to produce some job growth, but not quickly enough to substantially lower the unemployment rate or the number of people filing for new unemployment benefits each week. In short, the economic and policy uncertainty that is restraining the rest of the economy is still clearly being felt in the labor market, and only a resolution of that uncertainty will lead to an improved labor market in the months and quarters ahead.

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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.

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 #1-021222 (Exp. 11/12)

Weekly Economic Commentary

What a Surprise

As is often the case during the first week of the month, this week is an extremely busy one for economic data. But the data, which includes key reports on ISM, chain store sales and the labor market in October, may be reduced to a side show, given all of the other potentially market moving events on tap this week. Last week’s batch of economic data — including the third quarter gross domestic product (GDP) report-marked yet another week that the economic data in the United States surprised to the upside. How much longer can the data continue this pattern?

This week (October 31 through November 3) is chock full of key economic reports in the United States. But the data itself may only be a side show given the myriad of policy and corporate events also competing for the market’s attention this week. The key reports this week include the Institute of Supply Management’s (ISM) report on manufacturing for October, the chain store sales data for October and of course the October employment report. However, there are several other potentially market moving events on tap, including:

·         Vehicle sales for October

·         Challenger layoff announcements for October

·         ADP employment change for October

·         Initial claims for unemployment insurance for the week ending October 29

·         Weekly retail sales for the week ending October 29

·         The ISM’s non-manufacturing survey for October

In addition, the October ISM report for China is set to be released late Monday night, October 31, as fears continue to swirl in the marketplace about a so called “hard landing”— a sharp and unwanted slowdown in economic growth in China to around 5 or 6% from the current growth rate around 9%. Our view remains that China can achieve a soft landing, and that Chinese authorities are close to taking steps to stimulate the Chinese economy.

The ISM report in the United States is expected to show that manufacturing sentiment improved slightly in October, but remained well below its early 2011 peak. The ISM peaked above 60 (a reading above 50 suggests that the manufacturing sector is expanding, while a reading below 50 suggests that the manufacturing sector is contracting) in early 2011. But the ISM almost never stays above 60 for very long. In fact, during the middle part of expansions (mid-1980s, mid-1990s and mid-2000s) the ISM often dips below 50 for a month or two without signaling a recession. Historically, a reading on the ISM below 42.5 is consistent with a recession in the United States.

The consensus for the October ISM report (based largely on the October readings from the various regional Fed manufacturing surveys that have already been released) is for the ISM in October to move slightly higher to 52.0 from 51.6 in September. The low estimate (among the 82 estimates compiled by Bloomberg) is 50.5 while the high estimate is 53.7. Thus, it would likely take a reading below 50 or above 54 to substantially move markets when the data are released at 10 AM eastern time on Tuesday, November 1. The market will also want to pay close attention to the new orders and employment components of the ISM report. The new orders component is a solid indicator of future manufacturing activity, and the employment reading can provide some insight into the labor market in the manufacturing sector. The employment reading within the ISM has been above 50 in each of the past 24 months dating back to October 2009.

Jobs remain a key concern for markets, and the October employment report will provide a comprehensive look at the labor market in the month. Our view remains that the labor market is stuck in neutral. The economy is growing just enough to produce some job growth, but not quickly enough to substantially lower the unemployment rate or the number of people filing for new unemployment benefits each week. In short, the economic, policy and regulatory uncertainty that is restraining the rest of the economy is still clearly being felt in the labor market, and only a resolution of that uncertainty will lead to an improved labor market in the months and quarters ahead.

The unemployment rate — which is derived from a survey of 60,000 households — is expected to remain at 9.1% in October. The unemployment rate is calculated by dividing the number of unemployed persons seeking work (about 14 million) by the number of people in the labor force (about 154 million). A 9.1% reading in October would mark the fourth consecutive month at 9.1%, demonstrating some stability in the labor market, but no improvement. The unemployment rate peaked at 10.1% in October 2009, but was as low as 4.4% as recently as early 2007.

The monthly job count is derived from a survey of businesses (140,000 businesses representing more than 400,000 worksites) and has been conducted each month for more than 60 years. The market is expecting an increase of 125,000 private sector jobs in October, a slight deceleration from the 137,000 private sector jobs created in September. Year-to-date through September, the economy has created an average of 150,000 private sector jobs per month. This is about the same pace at which the labor force increases each month, which helps to explain why the unemployment rate has remained around 9.0% this year. While the private sector is expected to have added about 125,000 jobs in October, the public sector (federal, state, and local governments) is expected to see another drop in jobs. In particular, the state and local government sector has shed jobs in eight of the nine months in 2011 and in 30 of the past 38 months. In all, state and local governments have shed 597,000 jobs since mid-2008, an average of about 15,000 per month. We expect this pace of downsizing in the state and local government sector to persist for the foreseeable future as they struggle to realign costs with revenues.

This week also features a Federal Open Market Committee (FOMC) meeting — accompanied by a press conference and a new economic forecast by Federal Reserve (Fed) Chairman Bernanke, and central bank meetings in Australia, Iceland, and in Europe. The market is expecting a rate cut in Australia, and the European Central Bank (ECB) under the new leadership of Mario Draghi, may also cut rates. The G-20 is set to meet this week, where the details of the European rescue plan are likely to be discussed, and 116 other earnings reports and outlooks from S&P 500 companies are scheduled for this week.

Lowered Expectations Opened the Door for the Economic Data to Beat Expectations

Last week’s batch of data in the United States — which included third quarter gross domestic product (GDP), along with data on housing, consumer spending and sentiment — marked another week in which the economic data in the United States surprised to the upside. How much longer can the data continue this pattern? If the past three years are any guide, we may only have a few more weeks of better-than-expected economic data, as economic expectations continue to move higher.

The Citigroup Economic Surprise Index (CESI) measures whether or not incoming economic data are beating economists’ expectations. There have been three distinct periods since 2008 in which the United States economic data has exceeded expectations, including the current period. The first came as the market first priced in (and then priced out) another Great Depression in late 2008 and early 2009. This episode of better than expected data lasted 23 weeks.

The next wave of better than expected economic data came in late 2010 through early 2011, just after market fears of a European debt crisis-induced double-dip recession pushed economic expectations sharply lower in the spring and summer of 2010. This wave of good news (relative to lowered expectations) began just after Fed Chairman Bernanke hinted at another round of quantitative easing — Fed purchases of Treasuries in the open market — in late August 2010, and lasted until just prior to the Japanese earthquake in mid-March 2011. This episode lasted about 28 weeks.

According to the CESI, the current run of better-than-expected economic data in the United States began in early June 2011, as economic expectations washed out after a post-Japanese earthquake improvement in the United States economic data fizzled and fears of a European debt contagion increased. This prelude was remarkably similar to (and caused by the some of the same fears) as the period just before economic expectations began to rebound in late 2010.

Since early June 2011, more often than not, the United States economic data has surpassed these lowered expectations. But now 19 weeks into this run of better than expected data, we are closing in on the average of the prior two episodes of better-than-expected economic data. Thus, if the past three years are any guide, we may only have another few weeks of better-than-expected economic data, as market participants continue to revise up their economic forecasts, after revising them down while pricing in a recession between the Japanese earthquake in March 2011 and early June 2011.

Our view remains that the United States economy will avoid recession, but that growth is likely to remain tepid, at best, over the next year or so, with the economy growing near its long term growth rate of around 2.0 to 2.5%. This pace of growth would be enough to avoid recession, but not enough to push the unemployment rate meaningfully lower.

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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.

Citigroup Economic Surprise Index (CESI) measures the variation in the gap between the expectations and the real economic data.

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.

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 Group of Twenty (G-20) Finance Ministers and Central Bank Governors is the premier forum for our international economic development that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe.

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 #1-018727 (Exp. 10/12)

Weekly Economic Commentary

Hard Data Versus Soft Sentiment: The Sequel

This week is a busy one for financial market participants, with corporate earnings reports, economic data and policy all competing for the market’s attention. The European fiscal situation remains at the top of the list of worries for markets, as policymakers scramble to hit a self-imposed early November deadline to have a grand plan in place to address Greece and European banks’ exposure to Greek and other troubled sovereign debt. As we have noted in several of our recent commentaries, markets are still crying out for bold, coordinated policy actions here and abroad. Markets in the past week or so have become increasingly confident that such actions will be taken — although the devil is in the details.

But this week, a barrage of third-quarter corporate results (including guidance for the fourth quarter and next year), key data on housing, inflation and manufacturing in the United States, as well as several speeches from Federal Reserve officials (including Ben Bernanke) will all also compete for the market’s attention. The most closely watched report of the week is likely to be the Fed’s Beige Book, a qualitative assessment of business and banking conditions in each of the 12 Federal Reserve districts (Boston, Richmond, Dallas, Kansas City, Cleveland, etc.), compiled eight times a year prior to each of the Federal Open Market Committee (FOMC) meetings. China completes the release of its September and third-quarter data early in the week, with the third-quarter report on gross domestic product, as well as the September reports on industrial production and retail sales.

The Sentiment Data Versus the “Hard Data”: The Debate Continues

We have written extensively over the past several months about the conflicting messages being sent by the “hard” data on the economy, and the “soft”, or sentiment, data on the economy. Hard data statistically measures what consumers or businesses are doing, for example:

·         How many homes were sold?

·         How much revenue did a company generate?

·         What were a company’s earnings after expenses?

·         How much did consumers spend on groceries, or computers or television sets?

·         How many cars were produced and sold?

·         How many jet engines were exported overseas?

·         How many new orders for business equipment were placed?

·         How many jobs were created (or lost)?

·         How much oil or gasoline was produced and/or consumed?

On the other hand, the “soft” data are reports that measure sentiment, and do not actually measure anything other than how people or businesses feel.

The mood of consumers or businesses is, of course, greatly influenced by what they see around them every day. It is also impacted by what they see on television, in newspapers, on the Internet, on talk radio or from friends, neighbors and colleagues. And of course, lately, the media has been full of bad news on virtually every topic. However, the media itself is thriving on the bad news with some of the highest ratings, readers and listeners in history.

In recent months, the hard data has painted a stronger picture of the U.S. economy than that reflected by the sentiment data. But at times, the opposite is true, and the sentiment runs far ahead of the actual data, as was the case in 1999 and 2000 at the peak of the tech bubble and in the mid- 2000s as the housing bubble was just about to burst.

We expect, however, that the trend of the hard data painting a better picture of the economy than the soft data will continue this week. Ultimately, it is the hard data — not the sentiment (or soft) data — that will tell us whether or not we have re-entered a recession, have started to shed jobs again, or seen an uptick in inflation. However, poor sentiment (in both the consumer and business oriented segments of the economy) can feed on itself, and lead to a pullback in spending, which would then begin to negatively impact the hard data. We have not seen that yet, but those in the marketplace calling for a recession believe that the transition from poor sentiment to poor data is inevitable. We do not, and continue to place the odds of recession in the near term at about one in three.

As this report was being prepared, we received hard data for September (industrial production) and sentiment for October (the Empire State Manufacturing Index). Often, the sentiment data has the benefit (from the market’s perspective) of being timelier. For example, for the most part, this week’s hard data on the economy references September, but the week’s sentiment-based data is measuring sentiment in October.

True to recent form, the industrial production data revealed that overall industrial output (factories, utilities, and mining) increased by a modest 0.2% between August and September, and that output of factories alone increased by 0.4%. Industrial production, a key gauge of whether or not the economy is in or out of recession, is up nearly 4% from a year ago and continues to push higher. Overall, industrial production in the manufacturing sector has increased in 24 of the past 27 months since the end of the Great Recession in June 2009.

On the other hand, the Empire State Manufacturing Index, which measures how manufacturing contacts in New York state feel about their overall business (as well as employment, shipments, orders, etc.), remained below zero in October, indicating that manufacturing in the New York state region contracted for the fifth consecutive month. The good news here is that the contraction has not picked up momentum.

The other examples of hard data (mainly for September and early to mid- October) due out this week include:

·         Producer Price Index (PPI)

·         Consumer Price Index (CPI)

·         Housing starts

·         Building permits

·         Existing home sales

·         Initial claims for unemployment insurance

·         Weekly retail sales

·         Weekly mortgage applications and

·         Weekly car and light truck production

This rest of the week’s sentiment based data (for September and October) includes:

·         The National Association of Homebuilders Sentiment Index

·         The Fed’s Beige Book

·         The Philadelphia Fed Index

In addition, the index of leading economic indicators (LEI) for September is due out at the end of the week. The index is a compilation of ten data series. Seven of the components of the LEI are hard data, with two being sentiment based. The final component of the LEI is the stock market (as measured by the S&P 500 Index), which is hard data of course, but is often driven over short periods of time by sentiment. The LEI is expected to increase by 0.3% month-over-month in September, which would leave the index a robust 6.0% above its year-ago reading, a clear sign that despite the negative sentiment, the economy continues to grow, albeit modestly.

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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.

Manufacturing Sector: Companies engaged in chemical, mechanical, or physical transformation of materials, substances, or components into consumer or industrial goods.

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

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.

The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.

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

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.

The Industrial Production Index (IPI) is an economic indicator that is released monthly by the Federal Reserve Board. The indicator measures the amount of output from the manufacturing, mining, electric and gas industries. The reference year for the index is 2002 and a level of 100.

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 #1-013906 (Exp. 10/12)

Weekly Economic Commentary

The Next Two Million Jobs: An Update

The light calendar for U.S. economic data this week will allow market participants to focus on corporate data (the unofficial start of the third quarter earnings reporting season for S&P 500 companies is this week), Chinese economic data, and monetary policy here and abroad. However, the scramble to shore up the European banking system by European officials remains the market’s utmost concern. As we have noted in several of our recent commentaries, markets are still calling out for bold, coordinated policy actions here and abroad, and markets in the past week or so have become increasingly confident that such actions will be taken — although the devil is in the details.

The market-moving economic data reports released in the United States this week are: the September retail sales report, weekly readings on retail sales, mortgage applications, and initial claims for unemployment insurance. In addition, the full slate of Chinese economic data for September is set to be released this week: money supply, new loans, imports, exports and, most importantly, the producer and consumer price data. Market participants continue to try to gauge the impact of the global economic slowdown on both the Chinese economy and Chinese inflation. The next policy move by the Chinese central bank, the People’s Bank of China (PBOC), could very well be more important for markets than the next move by either the Federal Reserve (Fed) or the European Central Bank (ECB). If the September inflation readings in China continue to show that inflation peaked in July 2011, it may clear the way for a rate cut by the PBOC. On the other hand, a reacceleration of inflation in September might push the PBOC to tighten. Clearly, the market would prefer the former outcome rather than the latter. We continue to expect the next move by the PBOC will be to signal that it is finished raising rates for this cycle, but any rate cut may not occur until late in the year.

Outside of China, there are several key ECB and Fed officials slated to make public appearances this week. Notably, outgoing ECB President Jean Claude Trichet is scheduled to make three public appearances this week, while the man who is set to replace Trichet as ECB President at the end of the month (Italy’s Mario Draghi) is also on the docket. This week’s contingent of Fed speakers is clearly skewed to the “hawkish” (more concerned about inflation than growth) side of the Fed, so we would not be surprised to see several headlines in the popular press this week citing Fed officials worried about too much monetary policy stimulus in the United States. Our view here remains that Fed Chairman Bernanke, Vice Chair Janet Yellen and New York Fed President Bill Dudley form the center of gravity at the Fed, and any move by these three to signal less stimulus from the Fed would be significant.

The Next Two Million Jobs: An Update

The private sector economy added 137,000 jobs in September, beating expectations (+90,000) and accelerating from the 42,000 jobs added in August. The report was all the more encouraging given the simply horrendous policy and sentiment backdrop during the month of September here in the United States and overseas. Some of the bounce in jobs in September can be attributed to the return of 45,000 Verizon workers who went on strike in August. Looking at the past three months to smooth out the Verizon impact, the economy added around 120,000 jobs per month. Year-to-date, private payrolls have grown an average of 149,000 per month. While not a booming number, it is not a recessionary number either, and confirms our view that while employers are not doing much hiring, they are not laying off workers as they did in 2007, 2008, and 2009.

The monthly job count culled from a survey of 440,000 businesses across the nation, was not spectacular in September, but was solid and the details were modestly encouraging.

·         First, the prior two months' employment readings were revised up by a total of 99,000.

·         Second, Hurricane Irene and severe flooding as a result of the remnants of Hurricane Lee likely held the job count down by around 25,000 in September. These jobs are likely to return in October.

·         Finally, the September report noted the third consecutive increase in temporary help employment. This category is a very good leading indicator of future job gains.

On the downside, there was yet another loss (33,000) in state and local government jobs in September, the tenth time in the past 12 months that state and local governments shed jobs. Since August 2008, state and local governments have shed 615,000 jobs, as states and municipalities continue to struggle to align costs with revenues.

The nation's unemployment rate, culled from a survey of 60,000 households, found that the unemployment rate remained at 9.1% in September. The unemployment rate is defined as the number of unemployed persons (totaling about 14 million) as a percentage of the labor force (totaling about 154 million). In order for the unemployment rate to fall steadily, the economy must grow above its long-term potential growth rate of around 2.5%. Currently, the economy is growing, but only by around 2.0% or so.

The July 5, 2011 edition of the Weekly Economic Commentary was entitled: “The Next Two Million Jobs.” In that report, we noted that the economy had created over two million private sector jobs in the 14 months between February 2010 and April 2011, and outlined a bull, base and bear case for how long the economy would take to create the next two million jobs.

Since then, of course, the U.S. economy has hit another soft patch amid a torrent of bad news at home that included:

·         The lingering impact of the Japanese earthquake on the global supply chain.

·         The debt ceiling debate in July and early August.

·         The downgrade of the United States’ AAA-credit rating in early August.

·         The effects of Hurricane Irene.

·         Further declines in both consumer and business confidence.

·         The near 20% decline in the equity market, as measured by the S&P 500, between late July and early October.

Abroad, conditions also deteriorated with yet another flare-up of the European sovereign debt crisis that has dominated the landscape since mid-July.

During this period (May – September 2011), the private sector economy created another 526,000 jobs, or an average of just over 100,000 per month. While, the September employment report (released last Friday, October 7) was a relief to financial market participants who were expecting another dour report on the nation’s labor market, the September jobs report (and the revisions to prior months’ data) leave the nation’s job creation engine tracking much closer to our bear case than to our base case for creating the next two million jobs.

Setting aside the robust employment recoveries from the recessions in the mid-1970s and the early-1980s, we can compare how quickly the next two million jobs were created in the so-called “jobless recoveries” in the early 1990s and early 2000s. After the private sector economy created two million jobs in the aftermath of the 1990-91 recession, it took the private sector economy only another eight months to create the next two million jobs. Over this eight-month period (mid-1993 through early 1994), the economy created around 250,000 jobs per month as the Fed remained on hold and the economy reacted to an increase in tax rates in mid-1993.

After the private sector created roughly two million jobs in the aftermath of the mild 2001 recession, it took another ten months to create the next two million jobs. Over this ten-month period in 2005, the economy created around 200,000 jobs per month as the Federal Reserve raised interest rates by 175 basis points, the housing market boomed and fiscal policy in the United States tightened somewhat.

Using the prior two recoveries as a baseline, a goal of creating the next two million jobs in the ensuing eight to 12 months is consistent with monthly job growth of between 200,000 and 250,000 jobs per month, which has been our forecast since the beginning of 2011. At this pace of job growth, it would take another two and a half years (early 2014) for the economy to recoup all the jobs lost in the Great Recession. Under this scenario, the unemployment rate would likely decline modestly, the Fed would remain on hold until mid-2013, and the overall economy would probably grow at around 3.0%, just slightly above its long-term average.

A faster pace of job growth (around 300,000 to 350,000 per month) would create the next two million jobs by early 2012, and that outcome would certainly push down the unemployment rate, speed up the Fed’s exit from quantitative easing, and ease concerns about the durability of the recovery. At this pace, it would take around two years (mid-2013) to recoup all the jobs lost during the Great Recession. The economy would grow at around 3.5 to 4.0% under this scenario.

Unfortunately for the still nearly 14 million unemployed workers, neither our bull case nor our base case for “the next two million jobs” is unfolding so far. As noted, the private sector economy is creating around 100,000 jobs per month over the past three months. At this pace, it would take until late 2012 for the economy to create the next two million jobs, and would leave the unemployment rate about where it is now (9.1%). At this pace of private sector job creation, it would take five more years (late 2016) before the economy recoups all the private jobs lost in the Great Recession. Under this scenario, the economy would continue to struggle to grow at around 2.0% per year.

This outcome has already prompted the Fed to enact more stimulative monetary policy (committing in August 2011 to keep rates low until mid- 2013 and embarking on “Operation Twist” in September 2011) and could prompt more monetary stimulus from the Fed if the slow pace of job creation persists. The slow pace of job growth has already led to continuous talk about a “double-dip” recession, and that talk is likely to persist until the pace of job creation picks up.

While we expect the pace of job creation to reaccelerate back toward our base case (200,000 to 250,000 jobs per month) in the coming months and quarters as the factors restraining hiring fade, we continue to expect that the labor market will remain relatively subdued by historical standards, but grow just enough to promote near trend-like GDP growth in the quarters ahead.

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