Weekly Economic Commentary

Unemployment Improving, but Still Uncomfortably High

This week is extraordinarily busy for economic reports and potentially market-moving events in the United States and abroad. On the domestic economic front, the February Institute for Supply Management (ISM) report highlights a week that will also include the release of February vehicle sales data, January personal income and spending, and the second look at the fourth quarter Gross Domestic Product (GDP) data. Fed policy will also vie for attention as the Fed releases its Beige Book and Fed Chairman Bernanke delivers his semiannual monetary policy testimony to Congress.

It is just as busy overseas as Greece, Finland and Germany will vote to approve the latest Greek bailout. In addition, there is a European Union summit late this week, and several European nations (Italy, Germany, Spain and France) will hold bond auctions. The key event of the week will likely be the European Central Bank’s (ECB) offering of an unlimited amount of cheap money for three years to European financial institutions. There are parliamentary elections in Iran, and Iran will likely be in the news over its nuclear program and as long as oil prices stay high and in the headlines. China will release its ISM data for February as well.

Unemployment Rate Putting Pressure on Wage Growth and Spending

·         Any way you slice it, the unemployment rate remains uncomfortably high. We would be more skeptical of the drop in the unemployment rate if other measures of labor market stress (layoff announcements, initial claims for unemployment insurance, job openings) had not moved in the same direction as the unemployment rate. The recent rise in consumer sentiment to four-year highs also helps to corroborate the dip in the unemployment rate.

·         The slow pace of income growth (which takes underemployment into account) and the tepid pace of consumer spending for this stage in the business cycle confirms that the labor market is far from “normal.”

·         The basic methodology used to calculate the unemployment rate (and the other measures of labor market stress) has been in place since 1940.

The nation's unemployment rate dropped from a recent high of 10.0% in October 2009 to 8.3% in January 2012. The next employment report is due out on Friday, March 9. The pre-recession low in the unemployment rate was 4.4%, hit in late 2006 and early 2007. Thus, even after declining steadily for two-and-a-half years, the unemployment rate is still double where it was just prior to the onset of the recession. Broader measures of the stress in the labor market have moved lower recently as well, but also remain at nearly twice the level seen prior to the onset of the recession. For example, a measure of the unemployment rate that takes into account both people who have largely given up looking for work and workers who are able to find only part-time work stood at 15.1% in January 2012, down from the peak of 17.2% hit in late 2009, but still nearly double the rate (7.9%) in late 2006 and early 2007.

A survey of 60,000 households nationwide — an incredibly large sample size for a national survey — generates the data set used to calculate the unemployment rate. (Nationwide polling firms typically poll around 1,000 people for their opinion on presidential races.) The “household survey” has been conducted in much the same way since 1940, and although it has been "modified" over the years, the basic framework of the data set has stayed the same. The last major modification to the data set (and to how the data is collected) came in 1994.

The headline unemployment rate is calculated by dividing the number of unemployed (12.8 million in January 2012) by the number of people in the labor force (154.4 million). The civilian population over the age of 16 stood at 242.3 million in January 2012. You are identified as being part of the labor force if you are over 16, have a job (employed) or don’t have a job (unemployed) but are actively looking for work. You are not in the labor force if you are neither employed nor unemployed — this category includes retired persons, students, those taking care of children or other family members, and others who are neither working nor seeking work.

In January 2012, the labor force was 154.4 million, which consists of 141.6 million employed people and 12.8 million unemployed people. Another 87.9 million people over the age of 16 were classified as not in the labor force.

Stress Measures

We would be more skeptical of the drop in the unemployment rate if other measures of labor market stress (layoff announcements, initial claims for unemployment insurance, job openings, hours worked, etc.) had not moved in the same direction as the unemployment rate.

·         Layoff announcements — collected by a private sector outplacement firm, Challenger, Grey and Christmas — in the 12 months ending in January 2012 totaled 621,000, very close to a 12-year low hit in early 2011. In mid-2009, the 12-month total of announced layoffs was over 1.6 million.

·         Initial claims for unemployment insurance — tallied at the state level — averaged just 359,000 per week in the four weeks ending February 18, 2012, the lowest reading in four years. Claims peaked at nearly 650,000 per week in mid-2009. In mid-February, just under nine million people were receiving some type of unemployment benefit, down from close to 15 million in early 2010.

·         The number of job openings, as measured by the Bureau of Labor Statistics Job Opening and Labor Turnover report, found that in December 2011, there were nearly three million open jobs, up from just under 1.9 million in mid-2009.

·         Virtually every measure of consumer sentiment, all of which are collected by the private sector, is at or close to four-year highs. The improved sentiment is a function of a stronger equity market, less volatility in financial markets, improved labor markets, and until recently, lower gasoline prices.

·         The private sector Gallup polling firm regularly asks 18,000 Americans about their employment status, and the unemployment rate derived from that survey has moved down significantly since the beginning of 2010, tracking the official unemployment rate calculated by the U.S. Department of Labor.

·         However, the Gallup data also suggest that “underemployment” remains quite high, consistent with the government’s measure of “underemployment.”

The high level of underemployment (15.1% reading on the broadest measure of the unemployment rate) can be seen in the tepid gains in personal income derived from wage and salary income, which takes into account unemployment, underemployment and part-time work. By this measure, personal income (derived by adding up all the paychecks earned by all workers throughout the economy) is up by less than 4.0% from a year ago. The weak pace of personal spending (up just 3.9% from a year ago in December 2011) is another sign that while the labor market is healing, consumers are still struggling, especially as we are nearly three years into the economic expansion. Normally, at this point in the business cycle, personal incomes from wages and salaries, as well as personal spending are growing between 5% and 7% per year.

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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).

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 #1-049093 (Exp. 02/13)

Weekly Economic Commentary

Trade Offs

With the fourth quarter earnings reporting season wrapping up for corporate America, financial market participants will likely be focused on this week’s full docket of United States economic data and the latest flare-up in the European debt debacle in Greece. European debt markets outside of Greece will likely be in focus this week, as Italy, the Netherlands, France and Spain are slated to hold debt auctions. Central banks in Japan, Chile, and Sweden meet to set rates this week, with Sweden’s Riksbank expected to cut rates for a second time in two months after tightening monetary policy in 2010 and 2011. While the Federal Reserve’s next policy meeting isn’t until mid- March, several Fed officials are scheduled to make public appearances this week, including Fed Chairman Ben Bernanke.

All Eyes on Greece and Full Slate of U.S. Economic Data in the Week Ahead

Greece dominated the headlines last week in the vacuum created by a lack of United States economic data releases and only a scattering of corporate earnings reports for the fourth quarter of 2011. As we prepared this report for publication, the latest flare-up in the European fiscal mess that has dominated the headlines for nearly two years appears to have subsided (for now) after the Greek parliament agreed to another round of severe budget cuts in exchange for another round of loans from the international community led by the International Monetary Fund (IMF), the European Union and the European Central Bank. We continue to expect a mild recession in Europe in 2012 amid ongoing fiscal flare-ups similar to the one witnessed in Greece over the past week or so. This week’s debt auctions in several key European nations will be another test for markets wary of (and perhaps weary of) another debt-related market disruption in Europe.

Looking ahead, Bernanke will deliver his semiannual monetary policy report to Congress on February 29, the same day the Fed will release its Beige Book, a qualitative assessment of economic and banking conditions in each of the 12 Federal Reserve districts (Boston, Kansas City, Philadelphia, etc.) The next FOMC meeting is on March 13. Markets this week will try to reconcile the recent set of stronger than expected economic reports (especially the very robust January employment report) in the United States with the Fed’s aggressively loose monetary policy stance.

Trade Offs and Trade Flows

At his latest press conference (January 25, 2012) Fed Chairman Bernanke answered a question about whether or not the Fed had doubts about the recent run of stronger than expected economic reports in the United States by noting: “...we continue to see headwinds emanating from Europe, coming from the slowing global economy and some other factors as well. So, you know, we are obviously hoping that the strength we saw in the fourth quarter and in recent data will continue into 2012, but we’re going to continue to monitor that situation. I don’t think we’re ready to declare that we’ve entered a new, stronger phase at this point; we’ll continue to look at the data.”

We concur with Fed Chairman Bernanke that Europe remains a risk to the outlook for economic growth in the United States. However, in our view, the risk to the United States economy from Europe is concentrated on the financial side — a collapse of a European financial institution similar to the collapse of Lehman in the fall of 2008, which would likely trigger a freeze of global credit and another sharp contraction in the global economy — rather than on the strictly “economic” side of the ledger via fewer U.S. exports to Europe. The risks of such a collapse have diminished, thanks to bold policy actions by policymakers in late 2011, which included:

·         A commitment to closer fiscal and monetary integration within Europe (The “Grand Plan”) hammered out in October 2011;

·         The introduction of coordinated swap lines by global central banks in late November 2011; and

·         The European Central Bank’s (ECB) offering of an unlimited amount of cash (Long Term Refinancing Operation or LTRO) to financial institutions for three years in late December 2011.

But risks of this sort remain, as markets were reminded last week by the latest drama in Greece. There is still more work to do, as European nations face many monetary, fiscal and political hurdles in 2012. The ECB’s next LTRO is on February 29, and Italy, Spain, France, and the Netherlands issue debt this week. But, should a systemically important European financial institution trigger a global credit crunch, a recession in the United States is quite likely.

However, the mild recession that we expect (and is currently unfolding) in Europe in 2012 may not have as big an impact on the United States economy or on the sales and profits of U.S. corporations as is widely feared. The United States’ trade with Europe is relatively small. In 2011, we shipped just $268 billion worth of goods to Europe, equal to about 2% of the United States’ gross domestic product (GDP). In that same period, the United States shipped more than $700 billion in goods to fast-growing emerging markets, a figure equal to nearly 6% of U.S. GDP. In 2011, 50% of our exports headed to fast-growing emerging markets, while just 15 – 20% of our goods exports head to Europe.

The trade flows between Europe and the emerging markets are also of interest, as market participants weigh the possibility of a “hard landing” in China. What stands out to us is just how enormous the trade of goods is between Europe and emerging markets. The size of these flows may cut both ways however, as investors asses the risks of a slowdown in Europe on the global economy. In 2010 (the latest full year of data available) the emerging market economies shipped $1.4 trillion worth of goods to Europe, an amount that dwarfs the size of the trade flows between the United States and Europe. At the same time, Europe sent $1.1 trillion in goods to fast-growing emerging markets, a figure that represents 60% of Europe’s overall exports. Europe’s ability to send 60% of its exports to fast-growing emerging markets will help to offset some of the weakness in consumer, business and government spending within Europe in 2012.

Of course the slowdown in Europe will crimp demand for emerging market economies’ goods, which will, at the margin, slow growth in that region. But, on balance strong domestic demand for consumer goods, housing and investment, robust government spending in many emerging market economies, decent growth in emerging markets’ “other” major export destination (the United States) and central banks cutting rates should allow emerging markets to easily weather the mild recession in Europe. As in the United States, however, a collapse of a European financial institution and a freeze up of global credit and trade would likely also send many emerging markets on a course towards a “hard landing.”

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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.

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.

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 #1-045634 (Exp. 02/13)

Weekly Economic Commentary

Job Creation on Track to Sustain Economic Growth

The week after the release of the monthly employment report is typically quiet for economic data and events in the United States, and this week (February 6 – 10) is no exception. There are few, if any, potentially market-moving economic events in the United States this week, and with the fourth quarter corporate earnings season winding down, market participants are likely to be focused on monetary and fiscal policy at home and abroad, along with Chinese economic data for January. In addition, this week’s quiet domestic economic calendar will allow market participants to continue to mull over the January employment report in the United States, which was released on Friday, February 3. On balance, the report was one of the best readings on the United States labor market in years.

Private Sector Jobs Climb, Unemployment Rate Falls

The January employment report was one of the most robust employment reports in many years. The report found that the private sector economy added 257,000 jobs in January (versus expectations of a gain of just 160,000 jobs) and that the unemployment rate dipped another 0.2 percentage points to 8.3%. This result was much better than expected. Far from fluky, the January employment report was solid in nearly every respect, but more importantly, confirms other data on the economy in recently weeks that suggests the pace of the healing in the labor market has been accelerating.

Over the course of 2011 in the Weekly Economic Commentary, we wrote about “the next two million jobs,” after the United States economy had created two million jobs between early 2010 and April 2011 — after shedding nearly nine million jobs in and immediately after the Great Recession (December 2007 – June 2009).

In July 2011, we laid out our base, bull, and bear case scenarios for how quickly the economy would create the next two million jobs. Our base case was that the economy would create “the next two million jobs” by early 2012. The release last week of the United States government’s labor market report for January 2012 provided a good opportunity for us to revisit our forecast. But first, a few housekeeping issues about the employment report, which is subject to a number of revisions that impact the labor market data each year at this time.

Breaking Down the Revisions in January’s Employment Report

Every January, the Bureau of Labor Statistics (BLS) within the United States Department of Labor — the government agency that has been compiling the monthly jobs report for more than six decades — releases revised data on the number of workers on businesses’ payrolls and on the unemployment rate. The January report also incorporates new seasonal factors that slightly changed the month-to-month pattern of job gains and losses over the past several years. The net result of the benchmark revisions and the new seasonal factors was that the economy created 162,000 more jobs than previously thought between March and December 2011.

This upward revision is not unusual, as the revision usually matches to the direction of the overall data. That is, when the economy is weakening, and jobs are being lost, the annual benchmark revision to jobs is typically downward. On the other hand, when the economy is improving, and is generally adding jobs, the benchmark revisions to the data tend to add more jobs. The upward revision to the jobs data based on the new information was the first since 2006, a year in which the economy created a significant number of jobs.

Economy Continues to Track Our Base Case for the “Next Two Million Jobs”

According to the revised data, the private economy created the first two million jobs in this recovery between March 2010 and March 2011. Since then the private sector economy has created an additional 1.7 million jobs, and continues to track our base case for the “next two million jobs” as first detailed in our July 5, 2011 Weekly Economic Commentary. As we noted in that commentary, which was updated on October 10, 2011, how quickly the economy created the next two million jobs would help to determine the health and sustainability of the recovery.

At our last update on the “next two million jobs” topic in October 2011, job creation had stalled amid the growth scare surrounding the global supply chain disruptions resulting from the Japanese earthquake and tsunami in March 2011, the uncertainty surrounding the European fiscal situation throughout the spring, summer and fall of 2011, and the debate in the United States about the debt ceiling and near-term tax and spending outlook in the summer and early fall of 2011. At that time, job creation was tracking at or below our bear case for the “next two million jobs” as first outlined in July 2011. However, since the summer hiring lull (the economy created just 52,000 private sector jobs in August) the economy’s job creation engine has revved back up. On average, the economy has created under 220,000 private sector jobs per month since the beginning of September 2011, as some of the economic uncertainty surrounding the issues noted above retreated.

If sustained in the next several months, the economy will achieve our base case scenario of creating “the next two million jobs” by early 2012, by creating two million jobs between April 2011 and March 2012. A continuation of this pace of private sector job growth would see the economy recoup all the private sector jobs lost during the Great Recession in two years, by January 2014. This type of job growth would likely be accompanied by economic growth at or slightly above our GDP forecast for 2012 of 2.0% growth. This pace of job growth would likely still keep the Fed on hold until the end of 2014/early 2015.

The pace of job creation since early 2010 (when the economy began to regularly create jobs again) is right in line with job creation seen at similar points in the recoveries from the 1990 – 91 and 2001 recessions. However, this pace of job creation pales in comparison to the 5 million and 7 million jobs created at similar points in the robust economic recoveries of the mid-1970s and early-1980s, respectively.

Thus, at around 220,000 private sector jobs per month, the economy continues to track toward modest job gains, a modestly declining unemployment rate, a slightly below average rate of GDP growth, and a Fed that is poised to provide the economy more stimulus. However, if the pace of job growth accelerates to over 300,000 per month on a sustained basis, the Fed would likely hold off on any more moves to ease monetary policy. Alternatively, if job growth slows back to the 100,000 or so per month rate seen during the spring and summer of 2011, the Fed would likely need to remove easy monetary policy measures more quickly than the market now expects.

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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 unemployment rate is the percentage of the total labor force that is unemployed but actively seeking employment and willing to work.

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.

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

This research material has been prepared by LPL Financial.

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

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

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

Tracking #1-043628 (Exp. 02/13)

Weekly Economic Commentary

 Unintended Consequences of Low Rates

As is typical in the first week of a new month, this week (January 30 – February 3) is packed with key economic releases in the United States. Employment, manufacturing, consumer spending and consumer confidence will compete with another flare-up of the European fiscal woes and key manufacturing data in China. In addition, a number of Federal Reserve (Fed) officials are scheduled to make public appearances this week, including Fed Chairman Ben Bernanke, who will deliver testimony to the House Budget Committee on Thursday, February 2.

Impact of Energy Prices, Interest Rates and Dividends on Personal Income and Spending

Last week (January 23 – 27) the news that real gross domestic product (GDP) grew at just 2.8% in the fourth quarter of 2011 was a disappointment relative to expectations of a 3.0% gain. Consumer spending, which accounts for more than two-thirds of GDP, was a major contributor to that disappointing result, rising at just 2.0% between the third and fourth quarters of 2011. Market participants were looking for a slightly more robust gain of 2.4%.

The causes of tepid consumer spending in the economic recovery that began in mid-2009 are well documented and include (but are not limited to):

·         Sluggish labor market, underemployment and very modest income growth

·         Large overhang of consumer mortgage and consumer installment debt

·         Increased economic uncertainty leading to increased savings

·         Weak housing market

·         Tighter lending standards for consumer installment and mortgage debt

Consumer Income Growth Improving Modestly, but Employment Picture Needs to Change

Over time, consumer income growth is the best determinate of consumer spending growth. In 2011, personal incomes (which include income from wages and salaries, government transfer payments, rental income and income of small business owners) rose 4.7%, a stronger pace of growth than seen in 2010 (+3.7%), and a complete turnaround from 2009, when personal income fell 4.3%. However, over the past 50 years, personal income growth has averaged 7% per year. During the middle of the last economic recovery (2001 – 2007), personal income growth averaged close to 6%. The subpar growth in personal income in the current recovery relative to history and to prior recoveries is a direct result of the high unemployment rate (8.5% in December 2011) and the high underemployment rate (workers who are working part time, discouraged workers, etc.). Both the unemployment rate and the underemployment rate need to decline further in order to see a higher pace of income (and spending) growth in 2012 and beyond.

Some of the factors weighing on spending have improved in recent quarters, and some of the factors that have restrained incomes have eased as well. Consumers have spent the past three years spending a little, saving a little and paying down debt, reducing the record high debt-to-income levels seen at the worst of the financial crisis. However, debt burdens (as measured by total debt to income) remain high by historical standards. The housing market likely bottomed out nationally in early 2009, and has been recovering (albeit very slowly) since then. This has helped some consumers feel “wealthier,” but in general, the tepid housing market remains a key impediment to consumer spending. Banks’ lending standards for businesses and consumers seeking loans have loosened over the past several years, but it remains difficult for many consumers to borrow at low rates to finance a home or some other type of consumer good.

Lower Energy Prices Putting Dollars in Consumer Wallets

On the spending side, although the rise in consumer energy prices crimped economic growth in the first half of 2011, lower consumer energy prices since their peak in mid-2008 have helped to put more spending power in consumer wallets. In mid-2008, consumers were spending $713 billion per year on consumer energy products. In December 2011, the spend rate was just $621 billion. That is nearly $100 billion in additional spending power for consumers relative to the peak in energy prices in mid-2008. Warmer weather in much of the nation in December 2011 helped to hold down energy costs, and that warm weather extended into January 2012, which should leave some additional dollars in consumers’ pockets in early 2012.

Consumers Are Experiencing Lower Interest Payments and Less Interest Income

However, the big drop in interest rates (engineered by the Fed at the short end of the yield curve and the result of flight to safety, a lack of inflation and sluggish growth at the long end of the curve) cuts both ways. In general, consumers are net recipients of interest income (from savings accounts, certificates of deposit, Treasury notes and bills, etc.). As 2011 ended, consumers were receiving $975 billion in interest income and paying about $685 billion in interest to their creditors (credit cards, banks, mortgages, etc.). Both figures have dropped dramatically since the peak in 2008, when consumers were on the receiving end of over $1.4 trillion in interest income while paying out around $950 billion in interest. Thus, as 2011 ended, consumers were net recipients of around $300 billion in interest payments, down from close to $500 billion in mid-2008.

At his press conference after last week’s Federal Open Market Committee (FOMC) meeting, Fed Chairman Ben Bernanke acknowledged that low interest rates were impacting savers, but pointed out that “savers in our economy are dependent on a healthy economy in order to get adequate returns. In particular, people own stocks and corporate bonds and other securities as well as say, Treasury securities. And if our economy is in really bad shape, then they are not going to get good returns on those investments.”

Comeback of Dividend Payments by Corporations Provides Modest Offset

To Chairman Bernanke’s point, a modest offset to this hit to income for consumers is the comeback of divided payments by corporations since mid- 2008. Dividends paid by corporations to individuals are now almost back to their all-time peak set in early 2008, and have increased by more than $225 billion since their low in mid-2009. Adding dividends to the net interest received, we find that consumers’ net interest income plus dividends at the end of 2012 was $1.1 trillion, about $200 billion lower than at the peak in late 2008.

On balance then, lower rates have hurt consumer incomes and consumer spending, but Fed policies that help to stimulate growth helped companies to achieve and sustain profitability and increase their dividend payments to consumers, providing a slight offset. Lower consumer energy prices have also helped to boost consumers’ disposable incomes slightly, leaving more jobs and more incomes as the key driver of consumer spending in the period ahead.

____________________________________________

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 unemployment rate is the percentage of the total labor force that is unemployed but actively seeking employment and willing to work.

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.

Consumer Price Inflations is the retail price increase as measured by a consumer price index (CPI).

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.

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.

Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

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 #1-041464 (Exp. 01/13)

Weekly Economic Commentary

State of the Union Preview

President Obama’s State of the Union (SOTU), scheduled for Tuesday, January 24, is unlikely to be a big market mover. In fact, most SOTU speeches see less than a 1% move in the stock market on the following day and the average move is only 0.14%.  However, the themes and philosophy presented may shape the market’s movements in the months to come.

Rather than break new ground, the SOTU address is likely to echo the President’s December 6 speech in Osawatomie, Kansas. That speech was modeled after President Theodore Roosevelt’s 1910 historic address in that city on economic and social equality that led into 20th century progressivism, the central philosophy of Obama’s presidency.

The many topics of the speech — and their market impacts — can be broken down in terms of what will happen, what will not happen, and what could happen in 2012.

What Will Happen

In the SOTU address, Obama is very likely to highlight the immediate need for Congress to come together to extend the payroll tax cut and unemployment insurance benefits through 2012. In December 2011, a bitterly divided Congress could not come together on how to pay for a year-long extension and so only extended them for two months. We expect Congress to further extend these stimulus measures before they expire at the end of February, but the hostile negotiations — something the markets have had a break from in recent weeks — are likely to garner attention and help to renew market volatility after a remarkably stable advance in the first few weeks of the year.

Regulatory policy, an area where the executive branch is less dependent upon Congress’ leadership, will be a key part of the speech. The President is likely to highlight revamped housing programs, such as the Home Affordable Refinance Program (HARP), and announce a settlement that would end long running negotiations among Obama administration officials, state attorneys general and at least five of the nation’s largest financial services companies over “robo-signing” and questionable foreclosure practices. The settlement could be good news for Financials, one of the top performing sectors this year.

What Will Not Happen

The President is likely to call for increased infrastructure investment in the U.S. economy, including school construction, roads and bridges, and high-speed rails. Congress is unlikely to appropriate the funding to meet the President’s call on these items. Companies in the Industrial sector have performed well so far this year, but do not appear to be pricing in increased domestic infrastructure spending.

Job growth is key to the President’s re-election chances. Historically, inflation-adjusted, after-tax income growth of about 3% appears to be the threshold for incumbents to get 50% of the popular vote. Currently, this measure of per capita income is only growing at 0.1%.

While factors other than jobs have a bearing on the election, job creation may be the key measure by which Obama’s presidency will be judged. However, much like infrastructure initiatives, measures to stimulate job growth presented in the SOTU are unlikely to be funded.

The President will likely address eliminating the so-called Bush tax cuts for higher earners, especially those making $1 million or more a year. In addition, given the recent attention to Mitt Romney’s tax filings, the President may call for applying income taxes to carried interest. With the President due to release his budget on February 6, he may also address overseas corporate tax breaks. However, with the House in Republican hands, none of these tax proposals will pass this year.

What Could Happen

This SOTU may foreshadow the President tilting his focus away from domestic politics to foreign affairs over the course of 2012. In doing so, he is shifting from the area where the President is institutionally weak (domestic policies) to the place where the President is institutionally strong (foreign policy). A Congress divided into two houses, a Supreme Court, and the states limit the President dramatically in domestic politics. However, the Constitution and American tradition give the President tremendous power in foreign policy. The President will surely highlight the U.S. withdrawal from Iraq and the winding down of the war in Afghanistan. Another foreign policy matter that may move the oil markets will be his discussion about Iran and the potential impact of U.S., Japanese, and European sanctions on Iranian oil.

Obama’s re-election strategy may be one of opposition to Congress. Essentially, this was Bill Clinton’s strategy in 1996 with a Republican Congress and it worked. Going into opposition against Congress could energize the President’s base, but that base is in the low to mid-40s. By itself, this may not be enough. Instead, over the next 10 months, Obama’s strategy may be to shift from the domestic aspects of the presidency where he is weaker to the stronger part, foreign policy, where a president can generally act decisively without congressional backing.

The critical issue for post-Iraq war foreign policy may be the U.S. relationship with Iran. An often rumored “October” surprise is the idea of attacking Iran’s nuclear facilities. But a precise strike can be messy since it carries the risk of Iranian retaliation in the Strait of Hormuz through which a meaningful percentage of the world’s oil travels. An approach with less chance for global economic disruption is a generalized air campaign against both Iran’s nuclear and military sites. But, in our view, starting a war is a huge risk. Setting aside all other considerations, from a political point of view, it would alienate Obama’s political base, many of whom supported him because he would not undertake the unilateral military moves of his predecessor. This is not intended to imply President Obama would consider starting a war for political ends, but merely to show that even if it were a consideration it is unlikely to be a successful strategy.

However, there is another foreign policy option, one that would appeal both to Obama’s political philosophy and to his political situation: pulling a Nixon. In February 1972, the last year of his first term as he ran for re-election, President Richard Nixon visited China in a grand diplomatic gesture even while Chinese weapons were being used to kill American soldiers in Vietnam. In another interesting parallel that rings with echoes of the themes of Obama’s SOTU address, President Theodore Roosevelt did the same thing with the Soviets in 1941. A diplomatic engagement with Iran would seem to appeal to the President and his political base and rejuvenate some of the energy around a theme that helped him win the election in 2008.

We will be listening to the SOTU for clues as to the President’s foreign policy initiatives. If the President were to pursue this foreign policy choice, it may have the effect of sharply lowering oil prices — and help to stimulate the U.S. economy — as geopolitical risk fades and added supply returns with the potential for a lift of the long-running embargo that has blocked critical parts and equipment needed to ramp up Iranian oil output. While a gesture by no means guarantees a resolution, the markets may welcome news of a potential arrangement with Iran.

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IMPORTANT DISCLOSURES

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

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

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

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

This research material has been prepared by LPL Financial.

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

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

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

Tracking #1-037503 (Exp. 01/13)

Weekly Economic Commentary

Does Economic Momentum Exist?

In June 2011, Federal Reserve (Fed) Chairman Ben Bernanke noted that the economic recovery had been “uneven across sectors and frustratingly slow.” In November 2011, Bernanke said that there “have been some elements of bad luck” impacting the economy. Even before November, however, the recovery had been picking up some steam.

Has the economy’s luck turned, and is some forward momentum happening finally? This week’s rather modest set of data, compared to the deluge of data in the first week of 2012, is unlikely to change the market’s view that the U.S. economy gained some momentum as 2011 ended and 2012 began.

The slate of economic data this week — which includes early January readings on initial claims for unemployment insurance and weekly retail sales, December readings on retail sales and consumer sentiment, and November readings on job openings, business inventories and merchandise trade — will likely continue to show that the economy gathered momentum as 2011 drew to a close. The Fed's Beige Book, a qualitative assessment of banking and business conditions in each of the Fed's 12 regional districts, is also likely to garner significant market attention ahead of the late January Federal Open Market Committee (FOMC) meeting. Overseas, Chinese economic reports for December are due this week and are likely to show that China is headed for a soft landing, not a hard landing, and, more importantly, that Chinese inflation continued to moderate in December, which paves the way for more monetary policy easing in China in the coming weeks.

Economic Momentum Is Rare

The U.S. economy rarely proceeds, either forward or backward, in a straight line, accelerating or decelerating evenly as a car would when its driver is applying steady pressure to the gas pedal or the brakes. Normally, economic growth in the United States from quarter to quarter is a series of uneven fits and starts, acting more like a car with a manual transmission being operated by a teenager just learning how to drive.

Over the last 60 years, the quarter-to-quarter change in gross domestic product (GDP), the most comprehensive measure of the health of the economy, has rarely moved steadily up (or down) for more than a few quarters at most. The last time the economy steadily accelerated for three consecutive quarters was in mid-2004 into early 2005. The last time the economy steadily accelerated over four consecutive quarters was in the mid-1950s!

During the first nine quarters of the current economic expansion (which began in mid-2009), the economy has posted an average annualized growth rate of just 2.4%. This pace of growth trails the average growth rate experienced over similar time periods after the mild 1990 – 91 and 2001 recessions (2.8%), and is well below the average growth rate (5.7%) seen in the nine quarters after the severe 1973 – 75 and 1981 – 82 recessions.

However, over the first three quarters of 2011, the economy actually accelerated in a straight line, with growth in the first quarter increasing at a 0.4% annualized rate, 1.3% in the second quarter, and 1.8% in the third quarter. Our view is that the straight-line acceleration will continue into the recently completed fourth quarter of 2011, with real GDP rising at a 3.0 to 3.5% pace versus the third quarter. The third quarter GDP data is due out in late January, although financial markets have probably already discounted the acceleration in economic growth in the fourth quarter. Market participants are now more concerned with growth prospects in the current first quarter of 2012, and, to a larger extent, growth prospects for all of 2012.

The longer-term growth rate (or speed limit) for the U.S. economy is regulated by the growth in the labor force plus the output per worker (productivity). The Great Recession and its aftermath had noticeable impacts on both the growth in the labor force and productivity. However, the Fed (and other market participants) estimate the U.S. economy’s longer-term speed limit as being around 2.5 to 3.0%. Often, the economy is subject to temporary factors (natural disasters, unusual weather, supply chain disruptions, worker strikes, geopolitical events, etc.) that depress growth for a quarter or two, and the economy grows at a pace below its long-term potential. Once those factors fade, the economy oftentimes plays “catch up”, and growth can accelerate for a quarter or two, and grows above its long-term potential growth rate.

Recently, most of the fits and starts impacting the economy have depressed, rather than boosted, economic growth. From the fourth quarter of 2009 through the second quarter of 2010, the economy grew at 3.8%, 3.9%, and 3.8% as growth accelerated from the end of the Great Recession in the second quarter of 2009. However, the first flare-up of the European fiscal crisis in the spring and summer of 2010 (Greece, Portugal and Ireland) acted to depress growth, and later in the year and into 2011, rising consumer energy prices (largely the result of political turmoil in the Middle East) also pressured growth. By mid-2011, the European fiscal crisis broadened out, the dysfunction in Washington surrounding the U.S. fiscal situation negatively impacted both business and consumer sentiment, and the earthquake in Japan in March 2011, along with the long lasting disruptions to the global supply chain, slowed growth to nearly stall speed. An unusually snowy early 2011, together with record flooding and tornadoes in the U.S., also hampered growth in early 2011.

Momentum Turned in Late 2011

As 2011 turned into 2012, however, many, but by no means all, of these temporary factors that depressed growth between mid-2010 and mid-2011 were fading and beginning to reverse course, which appeared to provide the economy with some momentum:

·         The global supply chain disruptions due to the earthquake in Japan had largely run their course, although massive flooding in Thailand in mid-to-late 2011 has already begun adversely impacting output of some key components in the technology area.

·         Consumer energy prices moved sharply lower over the second half of 2011, and declines in food prices have also helped to cool consumer inflation.

·         The fiscal and legislative concerns surrounding the debt ceiling, our nation’s credit rating, and the extension of payroll tax cuts and unemployment insurance benefits appear to have waned for now. In general, the market and economy-driving political battles that hampered growth in 2011 are unlikely to be repeated in 2012, although they simmer just below the surface.

·         While the uncertainty surrounding the European fiscal situation remains a concern for consumers and businesses, our view is that recent policy actions by European politicians and the European Central Bank (ECB) have taken the worst case scenario off the table for now.

Looking ahead, warmer-than-usual weather, monetary policy easing in China, strong auto production schedules for the first quarter, the recent drop in initial claims for unemployment insurance, the surge in consumer sentiment, and the solid December jobs report (released on Friday, January 6) all suggest that “economic momentum” will persist into the first quarter of 2012. However, with several sectors of the economy still struggling (housing, state and local government, construction of office parks, malls and factories), another round of economic speed bumps could very easily slow the economy’s hard won momentum as 2012 progresses.

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

Stock investing involves risk including loss of principal.

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

Credit rating is an assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.

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 #1-035765 (Exp. 01/13)