1. Productivity and Costs (Measure of Changes in Worker Efficiency) Web address: Revisions can be substantial Productivity – output of goods/services per labor hour. Measures how firms are using their employees and physical capital (land, materials, equipment). Most important determinant of economy’s long-term health and prosperity. Higher productivity keeps inflation,  P/P, in check. Track non-farm business sector productivity for best reading on Y. (75% of GDP) Productivity Growth and a Virtuous Cycle:  productivity (Y/L) =>  economic growth (  Y/Y) without inflation (  P/P). Falling ULC =>  exports (X),  household wages/income,  corporate profits,  dividends, =>  business investment spending, =>  (Y/L) The Business Cycle and Productivity Swings (cyclical productivity growth, %  (Y/L)) Economic slowdown:  spending =>  production (Y) =>  (Y/L) Recession:  labor (L) =>  (Y/L) Recovery:  production (Y) =>  (Y/L) Expansion:  labor (L) =>  (Y/L) The Productivity/Unemployment Relationship:  (Y/L) =>  profits =>  Investments => new business =>  employment 3 Major Components: %  W = %  (Y/L) + %  (WL)Y 1. Output Per Hour (Y/L): Productivity measures labor efficiency. Labor productivity is a leading indicator of inflation (  P/P). Productivity growth helps determine economic speed limit. Maximum sustainable economic growth rate = productivity growth + labor force growth 2. Compensation Per Hour (W): average hourly compensation rate. Provides clues on emerging wage pressures. Compensation = wages, salaries, bonuses, commissions, value of employment paid benefits (health costs, social security funds, private pensions). Compare compensation growth to productivity growth. 3. Unit Labor Costs (WL/Y): Labor costs to produce a single unit of output. Excellent indicator of business labor costs. Link between compensation per hour and output per hour. W = Y/L x (WL)/Y. Labor costs equal 2/3 of all business expenses. Close statistical relationship between ULC and CPI.  ULC =>  P/P and  profits.  = PY –WL.   Y = P –  (WL)/Y If productivity growth > compensation growth =>  ULC =>  profits,  inflation,  wages,  stock prices,  living standards If compensation growth > productivity growth =>  ULC =>   P/P ------------------------------------------------------------------------------------------------------------------------------------------------------------------ Market Analysis: Bonds:  %  (Y/L) and  W/W =>  (  P/P) E t+1 =>  D Bonds =>  i Bonds Stocks:  (Y/L) =>  (WL)/Y, (ULC) =>  profits =>  P Stocks Dollar:  Y/L =>  U.S. global competitive position =>  [  P/P U.S. /  P/P ROW] =>  X,  M =>  dollar

2. 4th Quarter 2012 (SAAR) 2.4% = 4.5% + = -2.1 Compensation = Labor Costs per Output + Output per Hour

3.  = PY – wL Productivity = Y/L  Y/L =>    P =>   Wage Growth Rate Analysis  W/W = %  (Y/L) + (  P/P) 2002-2003, U.R. > 5% 4% = 4% + 0% Wage growth compensated for productivity but not the 2.2% inflation 2005-2006, U.R. < 5% 4.5% = 2.5% + 2% Wage growth compensated for productivity, and part of 3.5% inflation

4. Circular-Flow Diagram Government Firms Markets for goods and services Financial Markets Households Factor Markets Rest of the world Government purchases of goods and services Government borrowing Private savings Government transfers Wages, profit, interest, rent Borrowing and stock issues by firms Foreign borrowing and sales of stock Foreign lending and purchases of stock Exports Imports GDP Taxes Consumer spending Investment

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8. Housing Starts & Building Permits (Measure of Current and Future Housing Construction) Web: www.census.gov/const/www/newresconstindex.html Housing starts has revisiosn for preceding 2 months, permits for preceding one month. Seasonal adjustment changes made in April for past 2 years. Housing starts and permits are very effective and reliable leading indicators of future economic activity. Both are useful forecasting tools. Census Bureau surveys builders in 19,000 localities across the county during the first 2 weeks of each month. Housing starts are seasonally adjusted but extreme weather conditions can make data extremely volatile. So monitor data over 3-4 month period to detect underlying trend. Housing starts are a function of interest rates, real personal income growth, consumer confidence, and tax legislation (builder tax breaks, mortgage interest payment deductions) Housing is a very interest rate sensitive market.  interest rates =>  housing demand =>  housing starts  interest rates =>  builders demand for construction loans Housing has a large “multiplier effect” on the economy and is a major swing industry.  housing construction =>  many other sectors ( steel, wood, electricity, glass, plastic, wiring, piping, concrete). House ground breaking to completion typically takes 6 months. A vibrant home selling market =>  sales of furniture, carpets, home electronics and appliances. 3 Housing Starts Categories: Single Family homes – 75% of total home building (reliable economic indicator) 2-4 unit apartments – 5% of market (townhouse or small condos) > 5 unit structures – 25% of residential housing starts (apartment buildings) 50 unit apartment = 50 starts Housing starts > 2 million may lead to shortages of supplies and skilled workers Housing starts between 1.5-2 million indicates healthy home construction industry Housing starts < 1 million leads to an economic slowdown Housing permits – Builders in most U.S. localities must file a permit and receive authorization in advance of construction. Permits lead housing starts by 1-3 months and is one of the 10 components of the Index of Leading Economic Indicators ------------------------------------------------------------------------------------------------------------------------------------------------ Market Analysis: Bonds: If housing starts  & Y > Y Pot =>   P/P =>  D Bonds =>  i Bonds Stocks: If housing starts  =>   Y/Y =>  profits =>  P Stocks Dollar: Housing starts  =>   Y/Y =>  profits and i Bonds =>  dollar