Summary

• Excluding the 2001 recession, U.S. real GDP and productivity are registering their worst combined growth performances since the start of the American productivity surge in 1995.

• In stark contrast with the period between 2001 and 2004, unit labor costs (which businesses are no longer able to fully pass on to households) are now growing faster than inflation.

• Profits in non-financial businesses have declined in two of the past three quarters. Furthermore, the pullback in Q4 of 2006 (at -24% on an annualized basis) was the worst since Q1 of 2003.

• Even in the absence of a recession, a downturn in profits per unit of real growth in value added, typically leads to a profit recession. In the first phase of the pullback, margins tend to diminish more rapidly. That is what happened in 1967, 1986 and 1997.

• Similar conditions to those prevalent during previous profit recessions (outside of economic recessions) now exist south-of-theborder. The luck seems to have changed for profits of US nonfinancial corporations.

Weekly indicators

United States

Retail sales increased by 0.7% in March, or 0.8% excluding automobile sales. The retail sales report was relatively positive, however somewhat of a slowdown can be seen relative to the third and fourth quarters of 2006. The consumer price index rose by 0.6% in March, however the core index increased by just 0.1%, which was below consensus estimates. Goods prices fell for the first time in four months in March. Housing starts provided a pleasant upside surprise increasing by 0.7% in March to an annualized rate of 1.518 million units. The rebound is probably linked to the weather. However with the large number of unsold home inventories in the US, a sustained rebound in housing starts is unlikely to occur. Industrial production fell by 0.2% in April and the capacity utilization rate pulled back to 81.4%. The pullback is attributable to a 7% fall in the production of public utility services. At the other end of the spectrum, the manufacturing sector grew by a robust 0.7%. However the increase is incompatible with the recent ISM survey results. As a result, manufacturing sector data will be closely watched during the coming months. This week??™s statistics paint a picture of an economy which is growing slightly below potential in a time of slowing inflation.

Canada

Core inflation grew faster than expected in March. However excluding Alberta??™s housing sector, inflation is running at 1.9%, below the mid-point of the Bank of Canada??™s target range.