LP L FINANCIAL R E S E AR C H

Weekly Economic Commentary

April 28, 2008

John Canally, CFA Executive Summary:

Investment Strategist
LPL Financial As has been the case for all but the first three weeks of 2008, the U.S. equity
market basically ignored last week’s slate of economic data, looking past
more bad news on new and existing home sales and consumer sentiment.
The March report on durable goods and the latest reading on jobless claims
were reasons for some optimism on the economy.

ECONOMIC CALENDAR Financial markets face several key reports on the economy this week,
including the first look at real GDP for the first quarter, the Institute for Supply
Tuesday, April 29 Initial Claims Management’s report on Manufacturing in April, and the employment report
Consumer Confidence wk 04/26 for April. Will financial markets look past a potentially below zero reading on
April Q1 GDP as “old news”? Will a fourth consecutive decline in nonfarm payrolls
Construction Spending
derail the recent recovery in the equity markets?
Wednesday, April 30 March
GDP
Q1 ISM PMI
April
Weekly Review:
GDP Price Deflator Financial Markets Continue to Look Past Weak
Q1 Domestic Car/
Light Truck Sales
Economic Data
Employment Cost Index April As has been the case for all but the first three weeks of 2008, the U.S. equity
Q1 market basically ignored last week’s slate of economic data, looking past
Friday, May 2
Chicago PMA Nonfarm Payrolls more bad news on new and existing home sales and consumer sentiment.
April April On the bright side, the March report on durable goods and the latest reading
on jobless claims were reasons for some optimism on the economy.
Thursday, May 1 Unemployment Rate
PCE April The financial headlines last week were dominated by bad news on
March
the economy…
Factory Orders
Personal Income April ƒ Slumping new and existing home sales
March ƒ Falling new and existing home prices
ƒ The third monthly drop in durable goods orders
ƒ The lowest reading on consumer sentiment in 25 years

Member FINRA/SIPC
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1 New and Existing Home Sales Continue to Slump...

New 1-Family Houses: Median Sales Price

% Change - Year to Year Dollars
NAR Median Sales Price: Existing 1-Family Homes, US
% Change - Year to Year $
30.0

22.5

15.0

7.5

0.0

-7.5

-15.0
85 90 95 00 05
Source: Census, Realtor / Haver 04/28/2008

…but the U.S. financial markets, having already priced in an economic

slowdown in the first half of 2008 over the first 3 weeks of 2008, ignored
this “bad” news and focused instead on the leading indicators of the
economy, which suggest that the U.S. economy will avoid the deep and
prolonged economic slump feared by many market participants only a few
short weeks ago.

2 ...and Home Sales are at Multi Year Lows

New 1-Family Houses Sold: United States

SAAR, Thous
Existing 1-Family Home Sales: United States
SAAR, Thous
1400

1200

1000

800

600

400
85 90 95 00 05
Source: Census, Realtor / Haver 04/28/2008

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3 Durable Goods Orders Down Three Months in a Row

Manufacturers’ New Orders: Durable Goods

%Change - Period to Period SA, Mil.$
22.5

15.0

7.5

0.0

-7.5

-15.0
00 01 02 03 04 05 06 07
Source: Census Bureau / Haver Analytics 04/28/2008

4 ...and Consumer Sentiment Hit a 25 Year Low

University of Michigan: Consumer Sentiment

NSA, Q1-66=100
120

100

80

60

40
80 85 90 95 00 05
Source: University of Michigan / Haver Analytics 04/28/2008

Among the good news released on the economy last week was:
ƒ A substantial drop in first time claims for unemployment benefits
ƒ An increase in orders for capital goods that suggests business capital
spending will reaccelerate in Q2 2008 and beyond.
ƒ A decline in the number of new homes on the market
ƒ A leveling off of the number of existing homes on the market

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5 Jobless Claims Still Not in a Recession Territory

Unemployment Insurance: Initial Claims,

4-Week Moving Average
SA, Thous
Unemployment Insurance: Initial Claims,
State Programs
SA, Thous
550

500

450

400

350

300

250
98 99 00 01 02 03 04 05 06 07

Source: Department of Labor / Haver Analytics 04/28/2008

6 Capital Goods Orders Suggest Business Spending Will Rebound

Mfrs’ New Orders: Nondefense Capital Goods ex Aircraft

% Change - Annual Rate SA, mil.$
40

20

-20

-40
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: Census Bureau / Haver Analytics 04/28/2008

On balance, the week’s economic data continued to suggest that the U.S.
economy continued to slow in Q1 2008 – after a lackluster performance in
Q4 2007 – but that the slowdown has not yet translated into a deep and
prolonged economic downturn similar to the ones in the mid 1970s and
early 1980s.

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The Week Ahead:

GDP, ISM and Employment Report Dominate a Busy
Week of Economic Data
Financial markets face several key reports on the economy this week,
including the first look at real GDP for the first quarter, the Institute for Supply
Management’s report on Manufacturing in April, and the employment report
for April. Will financial markets look past a potentially below zero reading on
Q1 GDP as “old news”? Will a fourth consecutive decline in nonfarm payrolls
derail the recent recovery in the equity markets?

Real gross domestic product (GDP for the first quarter of 2008) is due out
on April 30, and the market is looking for a meager 0.5% annualized growth
rate for Q1 following the equally meager 0.6% annualized gain posted for Q4
2007. Our long held view is that real GDP in Q1 is likely to come in between
-0.5 and +0.5%, as the economy continues to skirt the edge of recession.
Our question is: Will financial markets react if we get a negative print on
Q1 GDP?

7 Q4 2007 and Q1 2008 Saw Well Below Average GDP Growth

Real Gross Domestic Product

SAAR, %Chg
10.0

7.5

5.0

2.5

0.0

-2.5

-5.0
85 90 95 00 05
Source: Bureau of Economic Analysis / Haver Analytics 04/28/2008

The Institute for Supply Management’s (ISM) Report on Manufacturing for

April is due out on Thursday, May 1. The market is looking for a reading of
48.0, little changed from the 48.6 reading posed in March. As a reminder, a
reading below 50 on the ISM index suggests that the manufacturing sector is
contracting, but the ISM has to fall to at least the low 40s – if not below – to
indicate that the entire U.S. economy is in recession.

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8 The ISM Has to Fall to 41 or Below to Indicate Recession

ISM Manufacturing: PMI Composite Index

SA, 50+=Increasing
70

60

50

40

30

20
80 85 90 95 00 05
Source: Institute for Supply Management / Haver Analytics 04/28/2008

The nonfarm payroll jobs report for April is due on Friday, May 2. The
consensus is looking for a 75,000 decline in payrolls in April after the decline
of 80,000 in March. The nonfarm payroll job count has posted month over
month declines for three months in a row, and a fourth monthly decline
is quite likely in April. In the past, when payrolls have contracted in four
consecutive months, the broad U.S. economy has almost always been in
recession. However, monthly job losses in the last two recessions have
averaged about 150,000 per month. The job losses over the past three
months have averaged just 80,000 per month.

9 Employment is Likely to Post a Fourth Monthly Decline in April

Civilian Unemployment Rate: 16yr +

SA, %
600
500
400
300
200
100
0
-100
-200
-300
-400
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08

Source: US Department of Labor / Haver Analytics 04/28/2008

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The unemployment rate bottomed in March and December 2006 at 4.4%,

and since then has risen by 0.7 percentage points. In the past, whenever
the unemployment rate has moved up this quickly, the economy was in, or
about to enter, a recession. The unemployment rate and the employment
data in general are lagging indicators of economic activity, so the economy
and the stock market can and do move higher even if the employment data
look weak. Thus, unless there is a complete disaster – i.e., a drop of 200,000
or more in nonfarm payrolls in April – the equity market is likely to look past
another weak jobs report for April.

10 The Unemployment Rate is a Lagging Indicator of Economic Activity

Civilian Unemployment Rate: 16yr +

SA, %
12

10

2
80 85 90 95 00 05
Source: Bureau of Labor Statistics / Haver Analytics 04/28/2008

Important Disclosures
This report has been prepared by LPL Financial from sources believed to be reliable but no guarantee can be
made as to its accuracy or completeness. The opinions expressed herein are for general information only, are
subject to change without notice, and are not intended to provide specific advice or recommendations for any
individuals. Please contact your advisor with any questions regarding this report.
Investing in international and emerging markets may entail additional risks such as currency fluctuation and
political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially
less liquidity.
Stock investing involves risk including loss of principal.
Past performance is not a guarantee of future results. Indices are unmanaged and cannot be invested
into directly.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial, UVEST Financial Services
Group, Inc., IFMG Securities, Inc., Mutual Service Corporation, Waterstone Financial Group, Inc., and
Associated Securities Corp., each of which is a member of FINRA/SIPC.

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April 28, 2008 | Page 7 of 7

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