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Weekly Economic Commentary 6-14-12

Weekly Economic Commentary 6-14-12

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Published by: monarchadvisorygroup on Jun 14, 2012
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 Member FINRA/SIPCPage 1 o 5
Weekly Economic Commentary
June 11, 2012
John Canally, CFA
EconomistLPL Financial
Beige Book Window on Main Street
Economy Still Growing, but Uncertainty ReturnsHighlights
Beige Book heralds the returno uncertainty.Federal Reserve (Fed) Chairman BenBernake still open to more quantitativeeasing despite recent press reports.Households still digging out o net worthdestruction brought on by housing bustand nancial crisis.The Federal Reserve (Fed) released its Beige Book — one o our avoriteeconomic reports — last Wednesday, June 6, 2012. Along with testimonyby Fed Chairman Ben Bernanke on Thursday, June 7, the report providedmarket participants with valuable insights into the economy and the utureo the Fed’s monetary policy actions. A separate report prepared by the Fedand released last week, the Flow o Funds report or the rst quarter o 2012,provided a detailed, although not particularly timely window into the health oconsumer balance sheets in early 2012.The nearby word clouds are dominated by words describing the tone o theeconomy at the time the Beige Books were published. Below are someobservations on the current Beige Book (released on June 6, 2012) and theBeige Book released in early April 2012.
The economy is still expanding at a modest pace.
Themes that dominated the Beige Books last summer and all weakcondence, European concerns, and high uncertainty which hadnearly disappeared rom the Beige Books released in early 2012, arestarting to reappear amidst the renewed turmoil in Europe. Importantly,while the word “uncertain” appeared 15 times in the June 2012 BeigeBook (up rom 10 mentions in April and just nine in February 2012),the word “uncertain” appeared in the Beige Book 26 times as recently
Please see the LPL Financial Research Weekly Calendar on page 3
April 2012 Beige Book Word Cloud
Source: The Federal Reserve Beige Book, LPL Financial 04/16/12
June 2012 Beige Book Word Cloud
Source: The Federal Reserve Beige Book, LPL Financial 06/11/12
LPL Financial Member FINRA/SIPC Page 2 o 5
as the October 2011 Beige Book, ater peaking at 38 mentions in theSeptember 2011 Beige Book.
Warm weather almost certainly made an impact on economic activity inthe late winter o 2011 and early spring o 2012, and the economy is nowexperiencing “payback” as weather patterns return to normal.
Rising uel prices, which had been a major concern in the economy andin the Beige Book early this year, as they were in the spring and summero 2011, are now much less o a concern. In most cases, the mentionso “gasoline” or “uel” in the most recent Beige Book were to note thatprices had declined recently and were below year-ago levels.
Supply chain disruptions rom the Japanese earthquake and tsunamiand fooding in Thailand, which were requently mentioned in the BeigeBooks rom mid-2011 through early 2012, have now largely dissipated.On balance, the latest Beige Book depicts an economy that has not changedmuch since the last Beige Book, with words like “growth,” “continued,”“strong,” “demand,” and “increase” dominating both clouds. In short, thedetails o the June 2012 Beige Book do support the idea that some o therecent strength in the economic data may have been weather-related, whichsuggests that we could continue to see “payback” in the orm o soter dataover the remainder o the spring as the weather normalizes. The pace oeconomic growth, job growth, wage infation, and overall prices hinted at inthe Beige Book also support urther policy action rom the Federal Reserve assoon as the June 19 20 FOMC meeting.
Fed to Replace “Operation Twist” or Fed to Twist Again
Reports in the nancial media on Thursday, June 7 attributed that day’sbig reversal (rom solid gains in the morning to declines by the end o thesession) in equities to the lack o commitment rom Fed Chairman BenBernanke (in testimony beore the Joint Economic Committee [JEC] oCongress) to another round o quantitative easing. In our view, Bernankedid little to dissuade the market rom thinking the Fed would act on June20, and comments rom the parade o Fed ocials during the week o June4 – 8 also support our view that the Fed will act to replace “Operation Twist”(which ends on June 30, 2012) with some type o monetary stimulus at theconclusion o the June 19 20 FOMC meeting.
Net Worth Flowing Back to Households
The Fed’s Flow o Funds data revealed that household net worth (householdassets — including real estate, cars, cash, appliances, mutual unds,pension unds, Treasury notes, other nancial assets, etc. — less householdliabilities — consumer installment debt, mortgages, student loans, etc.) roseto $62.9 trillion by the end o the rst quarter o 2012, up more than $3 trillionrom a year earlier, but still about $4 trillion below the all-time peak hit in mid-2007, beore the real estate collapse and the onset o the Great Recession.A rising stock market, stability in home prices, and debt pay down (both
Household Net Worth Has Increased in Nine o thePast 12 Quarters, but Is Still Below the All-TimeHigh Hit Five Years Ago
0605040302010708091011 Households and Nonprofit Organizations:Net Worth,
NSA, Tril $ 
In our view, Bernanke did little todissuade the market rom thinkingthe Fed would act on June 20, andcomments rom the parade o Fedocials during the week o June 4 8.
Source: Federal Reserve Board, Haver Analytics 06/11/12
LPL Financial Member FINRA/SIPC Page 3 o 5
voluntary and involuntary) have helped to push household net worth higherin recent quarters. Household net worth has now increased in nine o the 12quarters since the stock market bottomed in the rst quarter o 2009.Although equity markets have declined so ar in the second quarter, bondmarkets have moved higher, consumers have continued to pay downdebt, and home prices have moved higher nationwide. This suggests thathousehold net worth will increase again in the second quarter, but will stillremain short o the all-time peak set in mid-2007. Household net worth is oneo the best predictors o current and uture consumer spending which, in turn,accounts or two-thirds o Gross Domestic Product (GDP).
Some Color on the Beige Book
As we noted in the June 4, 2012
Weekly Economic Commentary 
, theBeige Book compiles qualitative observations made by community bankersand business owners about economic (labor market, prices, wages,housing, nonresidential construction, tourism, manuacturing) and banking(loan demand, loan quality, lending conditions) conditions in each o the 12Fed districts (Boston, New York, Philadelphia, Kansas City, etc.). This localcolor that makes up each Beige Book is compiled by one o the 12 regionalFederal Reserve districts on a rotating basis — the report is much more“Main Street” than “Wall Street” ocused. It provides an excellent windowinto economic activity around the nation using plain, everyday language.The report is prepared eight times a year ahead o each o the eightFederal Open Market Committee (FOMC) meetings. The next FOMCmeeting is June 19 –20, 2012.The previous “word clouds” or “text clouds,” which are a visual ormatuseul or quickly perceiving the most important words in a speech,text, report, or other transcript, are culled rom the Fed’s Beige Bookspublished last week and in early April 2012. In general, the more oten aword appears in a speech, text, report or other transcript, the larger thatword appears in the word cloud. The word clouds show the top 50 wordsor each o the two Beige Books mentioned above. Similar words aregrouped together and common words like “the,” “and,” “a,” and “is” areexcluded, as are words that appear requently in all Beige Books (Federal,district, loan, level, activity, sales, conditions, rms, etc.).

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