Weekly Economic Commentary

Lessons From the Labor Market

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

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

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

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

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

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

Mining for Jobs

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

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

Manufacturing Jobs

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

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

Trimming Jobs from the Budget

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

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

Building New Jobs

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

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

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

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

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

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

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

This research material has been prepared by LPL Financial.

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

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

Tracking #1-068410 (Exp. 05/13)

Weekly Economic Commentary

License to Spend

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

The Skills to Pay to the Bills

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This research material has been prepared by LPL Financial.

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

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

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

Weekly Economic Commentary

New Paradigm in Global Growth

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

Fed Forecast: Moderate but Above-Consensus Growth

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

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

Consensus Views on Global Growth Mixed

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

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

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

Divergence Persists in Regional Growth Forecasts

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

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

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

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

Stock investing involves risk including loss of principal.

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

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

This research material has been prepared by LPL Financial.

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

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

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

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)