1. LP L FINANCIAL R E S E AR C H
Weekly Economic Commentary
October 10, 2011
The Next Two Million Jobs: An Update
John Canally, CFA The light calendar for U.S. economic data this week will allow market
Economist participants to focus on corporate data (the unofficial start of the third
LPL Financial quarter earnings reporting season for S&P 500 companies is this week),
Chinese economic data, and monetary policy here and abroad (please see
this week’s Weekly Market Commentary for a full preview of the earnings
Highlights season). However, the scramble to shore up the European banking system
„ The focus this week is likely to be on by European officials remains the market’s utmost concern. As we have
corporate and Chinese data, rather than noted in several of our recent commentaries, markets are still calling out for
U.S. economic data. bold, coordinated policy actions here and abroad, and markets in the past
„ The economy is tracking to our bear case week or so have become increasingly confident that such actions will be
for creating the next two million jobs. taken — although the devil is in the details.
The market-moving economic data reports released in the United States this
Economic Calendar week are: the September retail sales report, weekly readings on retail sales,
mortgage applications, and initial claims for unemployment insurance. In
Tuesday, October 11 Friday, October 14 addition, the full slate of Chinese economic data for September is set to be
NFIB Small Business Retail Sales released this week: money supply, new loans, imports, exports and, most
Optimism Index Sep
importantly, the producer and consumer price data. Market participants
Wednesday, October 12 Import Price index continue to try to gauge the impact of the global economic slowdown on
MBA Mortgage Sep
both the Chinese economy and Chinese inflation. The next policy move
Applications Index U of Mich Consumer by the Chinese central bank, the People’s Bank of China (PBOC), could
wk 10/07 Sentiment very well be more important for markets than the next move by either
FOMC Minutes Oct
the Federal Reserve (Fed) or the European Central Bank (ECB). If the
Thursday, October 13 Business Inventories September inflation readings in China continue to show that inflation peaked
Initial Claims Aug in July 2011, it may clear the way for a rate cut by the PBOC. On the other
wk 10/08
hand, a reacceleration of inflation in September might push the PBOC to
Trade Balance tighten. Clearly, the market would prefer the former outcome rather than the
Aug
latter. We continue to expect the next move by the PBOC will be to signal
Treasury Statement that it is finished raising rates for this cycle, but any rate cut may not occur
Sep
until late in the year.
Outside of China, there are several key ECB and Fed officials slated to
make public appearances this week. Notably, outgoing ECB President
Jean Claude Trichet is scheduled to make three public appearances this
week, while the man who is set to replace Trichet as ECB President at the
end of the month (Italy’s Mario Draghi) is also on the docket. This week’s
contingent of Fed speakers is clearly skewed to the “hawkish” (more
concerned about inflation than growth) side of the Fed, so we would not
be surprised to see several headlines in the popular press this week citing
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2. W E E KLY E CONOMIC CO MME N TAR Y
Our view here remains that Fed Fed officials worried about too much monetary policy stimulus in the United
Chairman Bernanke, Vice Chair Janet States. Our view here remains that Fed Chairman Bernanke, Vice Chair
Yellen and New York Fed President Bill Janet Yellen and New York Fed President Bill Dudley form the center of
gravity at the Fed, and any move by these three to signal less stimulus from
Dudley form the center of gravity at the
the Fed would be significant.
Fed, and any move by these three to
signal less stimulus from the Fed would
be significant. The Next Two Million Jobs: An Update
The private sector economy added 137,000 jobs in September, beating
expectations (+90,000) and accelerating from the 42,000 jobs added
in August. The report was all the more encouraging given the simply
horrendous policy and sentiment backdrop during the month of September
here in the United States and overseas. Some of the bounce in jobs in
1 Temporary Help Jobs Are Increasing Again, a Good September can be attributed to the return of 45,000 Verizon workers who
Sign for Future Job Growth went on strike in August. Looking at the past three months to smooth out
Change in Temporary Help Services Employment the Verizon impact, the economy added around 120,000 jobs per month.
Seasonally Adjusted, Thousands
80
Year-to-date, private payrolls have grown an average of 149,000 per month.
While not a booming number, it is not a recessionary number either, and
40 confirms our view that while employers are not doing much hiring, they are
not laying off workers as they did in 2007, 2008, and 2009.
0
The monthly job count culled from a survey of 440,000 businesses across
-40 the nation, was not spectacular in September, but was solid and the details
-80 were modestly encouraging.
„ First, the prior two months' employment readings were revised up by a
-120
01 02 03 04 05 06 07 08 09 10 11 total of 99,000.
Source: Bureau of Labor Statistics, Haver Analytics 10/10/11 „ Second, Hurricane Irene and severe flooding as a result of the remnants
(Shaded areas indicate recession) of Hurricane Lee likely held the job count down by around 25,000 in
September. These jobs are likely to return in October.
„ Finally, the September report noted the third consecutive increase
in temporary help employment. This category is a very good leading
indicator of future job gains.
On the downside, there was yet another loss (33,000) in state and local
2 Job Creation in This Recovery Is Running In Line government jobs in September, the tenth time in the past 12 months that
With the Prior Two Economic Recoveries state and local governments shed jobs. Since August 2008, state and local
2010 governments have shed 615,000 jobs, as states and municipalities continue
2003 to struggle to align costs with revenues.
1991
6% The nation's unemployment rate, culled from a survey of 60,000 households,
5% found that the unemployment rate remained at 9.1% in September. The
unemployment rate is defined as the number of unemployed persons
4%
(totaling about 14 million) as a percentage of the labor force (totaling about
3% 154 million). In order for the unemployment rate to fall steadily, the economy
2% must grow above its long-term potential growth rate of around 2.5%.
Currently, the economy is growing, but only by around 2.0% or so.
1%
The July 5, 2011 edition of the Weekly Economic Commentary was entitled:
0%
0 6 12 18 24 30 36 “The Next Two Million Jobs.” In that report, we noted that the economy
Source: LPL Financial, Bloomberg Data 09/14/11 had created over two million private sector jobs in the 14 months between
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3. W E E KLY E CONOMIC CO MME N TAR Y
February 2010 and April 2011, and outlined a bull, base and bear case for
how long the economy would take to create the next two million jobs.
Since then, of course, the U.S. economy has hit another soft patch amid a
torrent of bad news at home that included:
„ The lingering impact of the Japanese earthquake on the global supply chain.
„ The debt ceiling debate in July and early August.
„ The downgrade of the United States’ AAA-credit rating in early August.
„ The effects of Hurricane Irene.
„ Further declines in both consumer and business confidence.
„ The near 20% decline in the equity market, as measured by the S&P
500, between late July and early October.
Abroad, conditions also deteriorated with yet another flare-up of the European
sovereign debt crisis that has dominated the landscape since mid-July.
During this period (May – September 2011), the private sector economy
created another 526,000 jobs, or an average of just over 100,000 per month.
While, the September employment report (released last Friday, October 7)
was a relief to financial market participants who were expecting another
dour report on the nation’s labor market, the September jobs report (and
the revisions to prior months’ data) leave the nation’s job creation engine
tracking much closer to our bear case than to our base case for creating the
next two million jobs.
Various Outcomes for Job Creation
Date By How Many Date By
Which Months More Which All
“Next To Create Years To Jobs Lost
Jobs Two “The Recoup All During Economic Fed
Created Million Next Two Jobs Lost Recession Outlook Outlook
Per Jobs” Are Million in Great Would Be Under This Under This
Month Created Jobs” Recession Recouped Scenario Scenario
Base 225,000 Early 2012 12 2 Years, 4 Early 2014 Modest GDP On hold
Case Months Growth Near until mid-
3.0% 2012
Bull Case 325,000 Early 2012 10 1 Year, 8 Mid 2013 Robust GDP Stimulus
Months Growth near starts
4.0% to be
removed in
late 2011
Bear 125,000 Late 2012 17 4 Years, 3 Late 2015 Very Sluggish More
Case Months GDP growth stimulus
below 2.0% from the
Fed
Current 105,000 Late 2012 19 5 Years Late 2016 Very More
Pace Sluggish stimulus
GDP growth from the
below 2.0% Fed
Source: LPL Financial Research 10/10/11
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4. W E E KLY E CONOMIC CO MME N TAR Y
Setting aside the robust employment recoveries from the recessions in
Using the prior two recoveries as a the mid-1970s and the early-1980s, we can compare how quickly the next
baseline, a goal of creating the next two two million jobs were created in the so-called “jobless recoveries” in the
million jobs in the ensuing eight to 12 early 1990s and early 2000s. After the private sector economy created two
months is consistent with monthly job million jobs in the aftermath of the 1990-91 recession, it took the private
growth of between 200,000 and 250,000 sector economy only another eight months to create the next two million
jobs per month, which has been our jobs. Over this eight-month period (mid-1993 through early 1994), the
forecast since the beginning of 2011. economy created around 250,000 jobs per month as the Fed remained on
hold and the economy reacted to an increase in tax rates in mid-1993.
After the private sector created roughly two million jobs in the aftermath
of the mild 2001 recession, it took another ten months to create the next
two million jobs. Over this ten-month period in 2005, the economy created
around 200,000 jobs per month as the Federal Reserve raised interest rates
by 175 basis points, the housing market boomed and fiscal policy in the
United States tightened somewhat.
Using the prior two recoveries as a baseline, a goal of creating the next two
million jobs in the ensuing eight to 12 months is consistent with monthly
job growth of between 200,000 and 250,000 jobs per month, which has
been our forecast since the beginning of 2011. At this pace of job growth,
it would take another two and a half years (early 2014) for the economy
to recoup all the jobs lost in the Great Recession. Under this scenario, the
unemployment rate would likely decline modestly, the Fed would remain
on hold until mid-2013, and the overall economy would probably grow at
around 3.0%, just slightly above its long-term average.
A faster pace of job growth (around 300,000 to 350,000 per month) would
create the next two million jobs by early 2012, and that outcome would
certainly push down the unemployment rate, speed up the Fed’s exit from
quantitative easing, and ease concerns about the durability of the recovery.
At this pace, it would take around two years (mid-2013) to recoup all the
jobs lost during the Great Recession. The economy would grow at around
3.5 to 4.0% under this scenario.
Unfortunately for the still nearly 14 million unemployed workers, neither
our bull case nor our base case for “the next two million jobs” is unfolding
so far. As noted in the "Various Outcomes" table (See page 3), the private
sector economy is creating around 100,000 jobs per month over the past
three months. At this pace, it would take until late 2012 for the economy to
create the next two million jobs, and would leave the unemployment rate
about where it is now (9.1%). At this pace of private sector job creation, it
would take five more years (late 2016) before the economy recoups all the
private jobs lost in the Great Recession. Under this scenario, the economy
would continue to struggle to grow at around 2.0% per year.
This outcome has already prompted the Fed to enact more stimulative
monetary policy (committing in August 2011 to keep rates low until mid-
2013 and embarking on “Operation Twist” in September 2011) and could
prompt more monetary stimulus from the Fed if the slow pace of job
creation persists. The slow pace of job growth has already led to continuous
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5. W E E KLY E CONOMIC CO MME N TAR Y
talk about a “double-dip” recession, and that talk is likely to persist until the
pace of job creation picks up.
While we expect the pace of job creation to reaccelerate back toward our
base case (200,000 to 250,000 jobs per month) in the coming months and
quarters as the factors restraining hiring fade, we continue to expect that the
labor market will remain relatively subdued by historical standards, but grow
just enough to promote near trend-like GDP growth in the quarters ahead.
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.
The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to
flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open
market operations to shorten the maturity of public debt in the open market. The action has subsequently
been reexamined in isolation and found to have been more effective than originally thought. As a result of this
reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.
The 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.
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.
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet
its financial commitment on the obligation is extremely strong.
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
Member FINRA/SIPC
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6. LP L FINANCIAL R E S E AR C H
Weekly Market Commentary
October 10, 2011
Earnings Season: What to Watch
U.S. stocks rose last week by 2.1%, as measured by the S&P 500 Index,
Jeffrey Kleintop, CFA
Chief Market Strategist
once again rebounding off the low end of the range from about 1100 to 1200
LPL Financial that has constrained the Index for the past couple of months. The rebound
was driven by a combination of solid and better-than-expected economic
data, few negative earnings pre-announcements, supportive actions by
Highlights
foreign central banks, and talk among European policymakers of injecting
While macroeconomic factors are likely to
capital into Europe’s banks to insulate them from a potential Greek default
remain key drivers of the market this week,
microeconomics will also garner investors’ and recession.
attention as companies begin to release their While macroeconomic factors are likely to remain key drivers of the
third quarter earnings reports. market this week, microeconomics will also garner investors’ attention
Market participants have priced declines as companies begin to release their third-quarter earnings reports. Four
in earnings into stock market valuations. times a year investors focus on the most fundamental driver of investment
Yet, analysts have high, double-digit growth performance: earnings. As you can see in Chart 1, the performance of the
expectations for earnings as profits reach a
S&P 500 and analysts’ revisions to their earnings per share (EPS) estimates
new record high for the first time since the
Great Recession.
are closely linked.
During this earnings season we are paying Market participants have priced declines in earnings into stock market
special attention to sales growth, exposure valuations, as we detailed in the Weekly Market Commentary from
to Europe, and how companies are putting September 9 entitled Recession Obsession. Yet, analysts have high
cash to work (or not) and the impact on the expectations for earnings. The consensus of analysts expects double-
outlook for coming quarters. digit, 13% profit growth (compared to the third quarter of 2010) in the third
quarter of 2011, as profits reach a new record high for the first time since
1 S&P 500 Performance and Earnings Outlook the Great Recession, and 15% year-over-year growth for the fourth quarter
Closely Linked for S&P 500 companies.
S&P 500 Year-Over-Year Performance and Number of Who is right? The truth is likely to be in the middle as earnings expectations
Upward EPS Revisions Divided by Downward Revisions
Over Past Month for S&P 500 Companies (Three-Month are revised modestly lower and markets price in a less dire outlook for
Moving Average) profits as results are reported and guidance on coming quarters is provided
Revision Ratio (Up/Down) (Left Axis)
S&P 500 Year Over Year (Right Axis) by corporate leaders. In recent weeks, third-quarter earnings estimates
2.50 80%
have been falling. Of the 127 companies that pre-announced third quarter
60%
2.00 earnings guidance in recent weeks, the ratio of negative-to-positive news
40%
was 2.6, worse than the average ratio of 2.3 since 1995. For S&P 500
1.50 20% companies that have reported third-quarter earnings so far, 21 of 29 (72%)
1.00 0% have exceeded estimates, while six have missed estimates.
-20%
0.50 The third-quarter earnings season runs about four to six weeks starting
-40%
around two weeks after the close of the quarter. During this earnings
0.00 -60%
00 01 02 03 04 05 06 07 08 09 10 11 season we are paying special attention to sales growth, exposure to Europe,
Source: LPL Financial, Factset 10/07/11
The S&P 500 is an unmanaged index, which cannot be invested into
directly. Past performance is no guarantee of future results.
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7. W E E KLY MARKE T CO MME N TAR Y
and how companies are putting cash to work (or not) and the impact on the
outlook for coming quarters.
ƒ Sales Growth – We will be putting more emphasis this season on top-line
rather than bottom-line growth. Sales growth is expected by analysts to
come in around a strong 10%. One headwind companies face is sluggish
economic growth around the world, although they were able to post
strong growth in the first half of 2011 despite sluggish economic growth.
It is important to keep in mind that the
Another headwind is the movement in the value of the dollar. During the
companies that report early in the season third quarter, the dollar was down about 10%, on average, from a year
are most often not the bellwethers they earlier boosting the translation value of foreign-sourced profits. However,
are commonly thought to be. entering the fourth quarter the dollar is flat compared to a year ago,
eliminating a positive for profits.
ƒ European Exposure – Economic growth may likely continue, albeit below
average, in the United States over the next year and emerging markets are
expected to continue to grow. However, developed foreign economies,
particularly in Europe, may enter a recession in the next 12 months. S&P
500 companies’ revenues are composed regionally; about 46% of profits
come from foreign markets with about 29% of foreign profits derived from
Europe. However, that varies widely by sector and industry.
2 S&P 500 Dividend Payout Ratio Lowest in History ƒ Putting Cash to Use – Pressure is building for higher dividends as U.S.
S&P 500 Dividend Payout Ratio companies sit on record cash stockpiles and payouts remain at all-time
70%
lows. S&P 500 companies paid out 26% of earnings in the form of
60% dividends over the past year, down from 30% for much of the 2000s
50% and below the 30-year average of 40%. Company cash and equivalents
40% have soared to record highs even as companies have paid down debt in a
30% dramatic deleveraging over the past few years. A return to higher dividend
20% payouts would help attract investors seeking income in an environment of
very low bond yields. The S&P 500’s dividend yield stands at 2.2%, above
10%
the yield on the 10-year Treasury for one of the few times in history. Also,
0%
1977 1982 1987 1992 1997 2002 2007 share repurchases are a way of putting cash to work.
Source: LPL Financial, Standard and Poor’s, Thomson Financial 10/07/11 This week, just ten S&P 500 companies are due to report earnings. It is
important to keep in mind that the companies that report early in the season
are most often not the bellwethers they are commonly thought to be. We
may not really know how overall corporate results for the third quarter of
2011 are shaping up until just after the end of the month of October, when
about half of the S&P 500 companies will have reported.
LPL Financial Member FINRA/SIPC Page 2 of 3

8. W E E KLY MARKE T 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.
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.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as
interest rates rise and bonds are subject to availability and change in price.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of
principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the
value of a fund shares is not guaranteed and will fluctuate.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common
stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be
the single most important variable in determining a share’s price. It is also a major component used to calculate
the price-to-earnings valuation ratio.
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.
Stock investing may involve risk including loss of principal.
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
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