Economic Update

1
Economic Update

• February 13, 2007

2
The Economy

• The Bureau of Labor Statistics reported that
  labor productivity for non-farm businesses rose
  2.1 in the 4th quarter of 2006.
• Labor productivity is very important as it is a
  key determinant of both corporate profits and
  inflation.
• Productivity improved in the 4th quarter of 2006
  2.1 growth in the 4th quarter versus 1.3 growth
  in the 3rd quarter.
• However, productivity grew slower for the entire
  year 2.1 for all of 2006 versus 2.3 for all of
  2005.
• Unit labor costs for non-farm businesses rose
  2.8 in the 4th quarter of 2006 versus 3.1 in
  the 3rd quarter of 2006.
• Unit labor costs rose 3.2 for all of 2006 versus
  2.0 for all of 2005.

3
The Economy

• The Institute for Supply Management reported that
  its non-manufacturing index rose to 59 in
  January 2007, up from 56.7 in December 2006.
• This index has indicated that the services sector
  is growing for 46 consecutive months.
• William Poole, president of the St. Louis federal
  reserve bank and voting member of the Federal
  Open Market Committee, stated that he believes
  the U.S. economy should grow at a sustainable
  pace for 2007 and that inflation may continue to
  decline during the year.
• However, he also stated that the Fed is ready to
  take action (meaning raise short-term interest
  rates) if the core inflation rate does not drop
  below 2 during the year.

4
The Markets

• Fed officials commented that it is willing to
  raise short-term interest rates if the core
  inflation rate does not drop below 2.
• Such comments caused the bond and stock markets
  to react negatively for the week.
• All the major indexes were down fractionally.
• The Financial sector fell -0.51 on concerns
  about higher interest rates and reports from HSBC
  Holdings (HBC) that delinquencies on sub-prime
  mortgages are rising.
• The Technology sector fell -0.71 for the week as
  Micron Technology (MU) warned investors that
  prices for DRAM memory chips may decline 15-20
  and prices for NAND flash memory chips may
  decline 30-40 in the 1st quarter of 2007.

5
The Markets

• The Dow Jones Home Construction industry group
  fell 7.25 for the week after Toll Brothers (TOL)
  announced a 33 drop in orders.
• It was the worst performing industry group.
• QInsight believes that investors should
  anticipate more short-term price correction in
  the major stock indexes, but the technical
  outlook for stock prices in the next few months
  still looks promising for higher prices.
• The market is still in the Plunge phase.