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LP L FINANCIAL R E S E AR C HWeekly Economic Commentary November 7, 2011 Can The Labor Market JOLT the Economy?John Canally, CFA The upcoming week (November 7 – 11) is heavy on speakers from the FederalEconomist Reserve (Fed) and relatively light on U.S. economic reports, providing marketsLPL Financial ample time to reflect on the October employment report and to focus on the deliberation of the congressional super-committee and the latest news in Europe. The next round of Chinese economic data for October is due out Highlights this week, as the market continues to debate the hard landing/soft landing This week is heavy on Federal Reserve issue in China. We will continue to watch the “center of gravity” at the speakers and light on U.S. economic Fed — Chairman Bernanke, Vice-Chair Yellen and New York Fed President data, as markets mull Europe and a full Dudley — for any shift in tone. slate of Chinese economic reports. Aside from the regular weekly reports on retail sales and initial claims for The JOLTS data, along with the October unemployment insurance, none of this week’s batch of economic data in employment report reveal that the labor the United States is likely to be market moving. There are a number of Fed market continues to heal, but at an speakers this week, as market participants mull over last week’s Federal excruciatingly slow pace. Open Market Committee (FOMC) meeting as well as the press conference held by Fed Chairman Bernanke. This week’s speakers range from veryEconomic Calendar hawkish (Fed officials known to favor the low inflation side of the Fed’s dual mandate from Congress) to very dovish (Fed officials known to favor the full Monday, November 7 Thursday, November 10 employment side of the dual mandate). The hawks slated to speak this week Consumer Credit Initial Claims are Philadelphia Fed President Charles Plosser and Minneapolis Fed President Sep wk 11/5 Narayana Kocherlakota. The doves on the docket this week are San Francisco Tuesday, November 8 Trade Balance Fed President John Williams, Chicago Fed President Charles Evans and Small Business Sentiment Sep Boston Fed President Eric Rosengren. Oct Import Price Index JOLTS Job Openings Oct It is likely that the hawks will say that the Fed is putting too much monetary Sep Treasury Statement stimulus in the system, and equally as likely that the doves will say the Oct Fed needs to do even more to support the economy. While the media will Wednesday, November 9 MBA Mortgage Friday, November 11 likely focus on the extremes, we will continue to watch the Fed’s “center of Applications Index U of M Consumer gravity” — Bernanke, Yellen and Dudley — for any shift in tone at the Fed. Two wk 11/4 Sentiment of the three (Bernanke and Yellen) are set to make public appearances this Nov Wholesale Inventories week. We continue to expect the Fed to pursue historically accommodative Sep monetary policy in the period ahead. Even if the economy tracks to the market’s expectations (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecast for economic growth and the unemployment rate remains more optimistic than the market’s. The next FOMC meeting is in mid-December. Member FINRA/SIPC Page 1 of 4
W E E KLY E CONOMIC CO MME N TAR YIn our view, fears of a hard landing in This week’s economic calendar is filled mainly with second-tier reports onChina (and related issues like China’s the economy and with little in the way of corporate earnings news on tapbanking system and property market) are this week, markets are likely to continue to focus on Europe, the super- committee’s deliberations on the federal budget and on the full docket ofwaiting in the wings to replace Europe Chinese economic reports for October.and the U.S. fiscal situation as thefinancial market’s concern du jour. Unlike most developed markets (and most emerging markets), where the economic data calendar is set well in advance, the Chinese economic data calendar is relatively flexible. Reports on Chinese industrial production, retail sales, exports and imports, and perhaps money supply and new loans are likely to be released this week, as market participants continue to debate whether or not Chinese authorities can guide China’s economy, the world’s second largest, to a soft landing. Although fears continue to swirl in the marketplace about a so-called “hard landing” — a sharp and unwanted slowdown in economic growth in China to around 5 or 6% from the current growth rate around 9% — our view remains that China can achieve soft- landing growth of 7 to 8%, and that Chinese authorities are close to taking1 The Percent Of Job Quitters is Climbing, A Healthy steps to stimulate the Chinese economy. In our view, fears of a hard landing Sign for the Labor Market in China (and related issues like China’s banking system and property market) Private Sector Job Quitters As a are waiting in the wings to replace Europe and the U.S. fiscal situation as the Percent of Total Separations 0.675 financial market’s concern du jour. 0.600 The JOLTS Data and the Labor Market One report due out this week that we like to watch, but one the market 0.525 seems to ignore, is the job openings and labor turnover (JOLTS) report. The 0.450 JOLTS report does not get a lot of attention, mainly because it is dated (the report due this week is for September), and the market already has plenty 0.375 of information on the labor market in October. However, the JOLTS data 01 02 03 04 05 06 07 08 09 10 11 provides more insight into the inner workings of the labor market than theSource: Haver Analytics 11/7/11 monthly employment report does. JOLTS provides data on: The number of job openings (there were just over three million open jobs at the end of August) The number of new hires in a given month (four million positions were filled in August) Job separations (just under four million people left jobs in August) The data is conveniently broken down by industry group and by region as well. On the surface, the data reveals just how dynamic the U.S. labor market is, demonstrating how the economy creates (and destroys) tens of millions of jobs a year. Digging a little deeper, one of our favorite components of the JOLTS data can be found within the data on job separations. People are separated from their jobs either voluntarily (they retire or quit to take another job) or involuntarily (they are laid off or fired from their jobs). As noted above, just under four million positions were eliminated in August. About half of these (two million) came as a result of people leaving their current positions voluntarily. While not quite back to “normal” — during theLPL Financial Member FINRA/SIPC Page 2 of 4
W E E KLY E CONOMIC CO MME N TAR YThe steady climb higher in recent months mid-2000s economic expansion in the United States, roughly 55% of jobof the number of job separations that are separations were the result of workers voluntarily quitting their jobs — thevoluntary suggests that the labor market percentage of job quitters in August was far above the recession lows. In early 2009, during the worst of the Great Recession, only 37% of separationsis healing, albeit slowly, as individuals are were voluntary, suggesting that layoffs and downsizing accounted for nearlybecoming more and more confident in two-thirds of job separations. The steady climb higher in recent months of thethe labor market. After all, you would not number of job separations that are voluntary suggests that the labor market islikely leave a job in today’s environment healing, albeit slowly, as individuals are becoming more and more confidentunless another job was waiting for you. in the labor market. After all, you would not likely leave a job in today’s environment unless another job was waiting for you. As noted in last week’s employment report for October, the labor market is healing, but still has a long way to go. The data further undercuts the notion that the economy is in, or about to enter, a recession, although it does suggest only sluggish growth (2.0 to 2.5% GDP growth). The economy created 80,000 jobs in the month (expectations were for an increase of2 Job Creation In This Recovery Is In Line With the 125,000), but the job count in the prior two months was revised up by a Recoveries From the 1990 – 91 and 2001 Recessions combined 102,000, taking some of the sting out of the below-consensus October reading. The private sector created 104,000 jobs in October, as state 2010 2003 and local governments shed another 22,000 jobs. 1991 6% Over the past three months, the private sector has added an average of 122,000 jobs per month; good, but not great. The private sector economy 5% shed 8.8 million jobs between December 2007 and February 2010, but has 4% added just 2.8 million of those jobs back since then, creating jobs in each 3% of the past 20 months in the process. The increase in the number of private sector jobs over the past 20 months is in line with the pace of job creation 2% seen during recoveries from the last two recessions (1990 – 91 and 2001), as 1% seen in Chart 2. The payroll job count data is culled from a survey of 440,000 0% business establishments across the country. 0 6 12 18 24 30 36Source: LPL Financial, Bloomberg Data 11/4/11 The unemployment rate, calculated from a survey of 60,000 households across the country — a huge sample size for a national survey given that most polling on national elections survey only a few thousand people at most — dipped 0.1% to 9.0% in October. The unemployment rate is calculated by dividing the number of unemployed persons (about 14 million) by the total number of people at work or looking for work (about 154 million). The details of this household survey were solid, as the surveys count of employment increased by 277,000, the third consecutive sizeable gain (275,000+). The number of persons in the labor force (at work or looking for work) increased for the third consecutive month as well. On balance, the labor market remains stuck in neutral. The economy is growing just enough to produce some job growth, but not quickly enough to substantially lower the unemployment rate or the number of people filing for new unemployment benefits each week. In short, the economic and policy uncertainty that is restraining the rest of the economy is still clearly being felt in the labor market, and only a resolution of that uncertainty will lead to an improved labor market in the months and quarters ahead.LPL Financial Member FINRA/SIPC Page 3 of 4
W E E KLY E CONOMIC CO MME N TAR Y IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Job Openings and Labor Turnover Survey (JOLTS) is a survey done by the United States Bureau of Labor Statistics to help measure job vacancies. It collects data from employers including retailers, manufacturers and different offices each month. Respondents to the survey answer quantitative and qualitative questions about their businesses employment, job openings, recruitment, hires and separations. The JOLTS data is published monthly and by region and industry. This research material has been prepared by LPL Financial.The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit Member FINRA/SIPC Page 4 of 4 RES 3384 1111 Tracking #1-021222 (Exp. 11/12)
LP L FINANCIAL R E S E AR C H Weekly Market Commentary November 7, 2011 Kicking the Cannes The S&P 500 Index had a bumpy ride last week as it tumbled 5% in theJeffrey Kleintop, CFAChief Market Strategist first two days on the eve of the Group of 20 summit in Cannes, France, asLPL Financial the Greek Prime Minister proposed a referendum on the European debt deal. This political move risked scuttling the hard-fought deal that had been unveiled the prior week that contributed to the powerful stock market rally. Highlights Stocks recovered most of the lost ground later in the week as the Prime Stock market volatility was driven by last Minister withdrew his call for a referendum and moved toward establishing week’s political brinkmanship derailing plans to secure funding support from China a new government for Greece that is very likely to approve the controversial and other countries for the European debt debt rescue package. rescue plan, kicking the implementation of However, the political brinkmanship derailed plans by the leaders of Germany the plan down the road well past the G20 meeting in Cannes. and France to showcase the new plan in order to secure funding support from China and other countries.The French President said it may take until With every move in the stock market seeming February 2012 for a funding deal to be reached, kicking the implementation to coincide with a headline coming out of Europe, it would be easy to conclude that this of the plan down the road well past the meeting in Cannes. is the only issue that matters to investors. While hurdles to implementation of the debt plan are materializing, Italy’s By stepping back from the day-to-day and 10-year borrowing costs are slowly nearing the 7% threshold that forced week-to-week trading, it appears the issues Greece, Ireland and Portugal to seek bailouts last year. The yield on Italy’s 10- in Europe over the past couple of years have year bond rose to 6.35%, the highest since the creation of the euro currency merely created volatility around the true focus in January 1999. We expect the delay will force changes in the Italian of investors on the fundamental economic government and result in the passage of the difficult, but necessary reforms backdrop that continues to slowly improve. to return to a sustainable fiscal path. With every move in the stock market seeming to coincide with a headline1 Stock Market Tracking Economic, Rather Than coming out of Europe, it would be easy to conclude that this is the only European, Developments issue that matters to investors. By stepping back from the day-to-day S&P 500 (Left Axis) and week-to-week trading, we can see a different, longer-term pattern of Initial Jobless Claims in Thousands (Right Axis, Inverted)1700 performance emerging — one that reflects a different focus entirely. 2251500 If we look back at the past five years, we can see that stocks have very 3251300 425 closely tracked real-time economic data, as measured by the weekly tally of1100 initial claims for unemployment benefits as seen in Chart 1. It appears the 525 issues in Europe over the past couple of years have merely created volatility 900 625 around the true focus of investors on the fundamental economic backdrop 700 725 that continues to slowly improve. 500 825 2007 2008 2009 2010 2011 What else does this chart tell us? That the October rally was justifiedSource: LPL Financial, Bloomberg data 11/04/11 based on the underlying economic fundamentals and that stocks may haveThe S&P 500 is an unmanaged index, which cannot be invested into additional modest gains in the months ahead — barring distractions thatdirectly. Past performance is no guarantee of future results. Member FINRA/SIPC Page 1 of 2
W E E KLY MARKE T CO MME N TAR Y cause stocks to again deviate from the underlying driver. In fact, based on this relationship, if initial jobless claims fall to a more normal level of 350,000 by year-end 2012, the S&P 500 would be around 1400, well above Friday’s closing level of 1253.Job growth does not make for a healthy This would seem to suggest that what the market really cares about areeconomy; a healthy economy makes jobs. But we believe that would put too fine a point on it. Initial joblessjobs grow. claims do measure the conditions in the job market, but they are also a real-time, weekly reflection of economic conditions. While the President and GOP presidential candidates focus on promoting their job plans, we think it is important to keep in mind that job growth does not make for a healthy economy; a healthy economy makes jobs grow (see this week’s Weekly Economic Commentary for a look at the October employment report). The health of the economy reflected in initial jobless claims is critical to gauging the outlook for the magnitude and sustainability of profit growth critical to long-term stock market performance. 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 Group of Twenty (G-20) Finance Ministers and Central Bank Governors is the premier forum for our international economic development that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. 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 Member FINRA/SIPC Page 2 of 2 RES 3383 1111 Tracking #1-021251 (Exp. 11/12)