Weekly Economic Commentary

License to Spend

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

The Skills to Pay to the Bills

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

Federal Funds Rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis.

Private Sector – the total nonfarm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. The nonfarm payroll statistic is reported monthly, on the first Friday of the month, and is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity. It doesn’t include: - general government employees - private household employees - employees of nonprofit organizations that provide assistance to individuals - farm employees

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

This research material has been prepared by LPL Financial.

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

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

Tracking #1-066537 (Exp. 05/13)

Weekly Economic Commentary

New Paradigm in Global Growth

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

Fed Forecast: Moderate but Above-Consensus Growth

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

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

Consensus Views on Global Growth Mixed

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

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

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

Divergence Persists in Regional Growth Forecasts

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

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

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

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

Stock investing involves risk including loss of principal.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

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

This research material has been prepared by LPL Financial.

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

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

Tracking #1-064807 (Exp. 04/13)

Weekly Economic Commentary

Most Asked Fed Question May Go Unanswered

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

Fed Issues

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

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

Fed Forecasts

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

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

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

Fed Policy Firming

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

Putting It All Together

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

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

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

Stock investing involves risk including loss of principal.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

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

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

This research material has been prepared by LPL Financial.

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

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

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

Weekly Economic Commentary

March Job Report Disappoints, but Labor Market Continues to Heal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Stock investing involves risk including loss of principal.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

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

This research material has been prepared by LPL Financial.

LPL Financial is a member of FINRA/SIPC.

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

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

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

Weekly Economic Commentary

Jobs Looking for People

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

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

JOLTS provides data on:

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

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

·         Job separations.

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

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

Where Are the Jobs?

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

Jobs in this category include:

·         Legal services,

·         Accounting and bookkeeping,

·         Architectural and engineering services,

·         Computer systems design,

·         Management and technical consulting services, and

·         Temporary help services.

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

How Much Do They Pay?

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

What Kinds of Companies Are Hiring?

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

What Regions Have the Most Job Openings?

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

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

_______________________________________________

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

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

Stock investing involves risk including loss of principal.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

This research material has been prepared by LPL Financial.

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

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

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

Tracking #1-057980 (Exp. 04/13)

Weekly Economic Commentary

The Long Road Home

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

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

Still on the Road to Recovery

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

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

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

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

Taking the Pulse

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

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

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

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

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

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

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

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

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

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

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

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

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

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

_____________________________________________

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

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

Stock investing involves risk including loss of principal.

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

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

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

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

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

This research material has been prepared by LPL Financial.

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

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

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

Tracking #1-056167 (Exp. 03/13)