Mutual of America Capital Management Corporation presents the following review of recent economic trends based on data pertaining to the month of April 2003. Comments reflect conditions as of May 5, 2003.

The first quarter of 2003 found the U.S. economy in something of a holding pattern as the threat of hostilities in Iraq weighed heavily on decision-makers. Now that the combat phase of American involvement in Iraq appears finished, the economy’s true health should come into better focus as spring gives way to summer.

Most disappointing were Commerce Department figures showing that real gross domestic product rose just 1.6 percent annualized in the first quarter of 2003. This represents an improvement over the 1.4 percent growth realized in 2002’s fourth quarter, but was below economists’ forecasts. Consumer spending, government spending and imports recorded slower growth in the first quarter, while business investment has now declined in nine of the last 10 quarters.

The Conference Board’s index of leading indicators fell 0.2 percent in March, which represents a slight improvement over February’s 0.5 percent decline. Five of the 10 components fell in March: building permits, jobless claims, interest rate spreads, money supply and consumer expectations. The Conference Board’s index, which is designed to forecast economic trends three to six months in advance, has been relatively flat since December 2001. The Conference Board has said this flatness suggests that U.S. real gross domestic product growth will hover between 2.0 and 3.0 percent for the foreseeable future, making labor growth unlikely. Sales figures from forest-products companies, which supply the country with paper and building supplies, help indicate business trends. These companies have forecast only modest improvement for the second quarter over what they termed “an extremely difficult” first quarter.

The reluctance of businesses to spend until recovery prospects come into better focus has factored strongly in the economy’s anemic performance. Federal Reserve Governor Ben Bernanke suggested in a speech that this attitude may become a self-fulfilling prophecy and represents one of the economy’s most pressing problems.

The U.S. dollar declined against several currencies, most notably the euro. Soon after it arrived in 1999, the euro plummeted in value, providing European companies with a large competitive edge against their American rivals. But the pendulum has swung, with a weaker dollar and stronger euro proving a boon for some U.S. companies. The weaker dollar helps U.S. exporters in that their products are cheaper for foreign purchasers, thereby boosting overseas sales. Furthermore, a weaker dollar makes foreign companies’ goods more expensive in the U.S. This weakening also has the effect of reducing foreigners’ U.S. investments.

Late April data releases suggest that some negative trends may have reversed themselves in March. Real consumer spending increased 0.1 percent in March after two months of declines. Retail sales were up 2.1 percent, due largely to an increased appetite for automobiles. Bad weather throughout much of the country in February kept consumers and their wallets home, but the end of winter and the war may have a positive ripple effect throughout the economy.

The Conference Board’s Consumer Confidence Index improved markedly in April. The Index, based on a survey of 5,000 U.S. households, reached its highest level since November. Now standing at 81.0, the Index was at 61.4 in March, but is still well below the reading of 108.5 it registered in April 2002. The two components of the Index, Present Situation and Expectations, rose to 75.3 and 84.8, respectively. Both were at 61.4 in March.

The words “labor” and “growth” have been strangers to each other lately. Economists view an initial jobless claims mark of 400,000 as a threshold – more than 400,000 represents a labor market that is stagnant or worsening, while less than 400,000 represents an improving jobs picture. The Labor Department’s most recent release showed initial jobless claims of 425,000. The four-week average of such claims (used to smooth out seasonal anomalies) was 446,000. Initial claims have topped 400,000 for 12 straight weeks. Continuous jobless claims now exceed 3.6 million. The Conference Board’s Help-Wanted Advertising Index dropped to 38 in March from 40 in February, and is down from 45 one year ago.

The unemployment rate increased to 6.0 percent in April, representing 8.79 million Americans who are unemployed but seeking work. Manufacturing job losses amounted to 95,000 in April. This sector has lost 2.3 million jobs in the last 33 months. Manufacturing employment is at its lowest level in 42 years.

Inflation remained low in March. The Consumer Price Index rose 0.3 percent, down from February’s 0.6 percent increase. The core rate of inflation (which factors out food and energy prices) shows a 0.8 percent annualized rate of increase for the first quarter of 2003 and a 1.7 percent increase for the previous 12 months. The quarterly increase is the lowest such rise in four years, while the annual increase is the lowest year-over-year rise since 1966. The inflation figures are higher if increases in energy prices are factored in. Gasoline prices rose 4.1 percent in March, with fuel oil up 9.8 percent and natural gas up 14.8 percent for the month. With the Middle East situation having stabilized, energy prices began to decline in April.

Concern about deflation may soon increase. Deflation is a vicious cycle in which falling prices lead to falling profits leading to job cuts leading to further price cuts, which has hampered Japan for the last decade. The Federal Reserve, however, has indicated its willingness to do what it takes to overcome the possibility of deflation.

The housing picture remains strong, although the numbers are down from the record levels of last year. Home resales, as measured by closings, fell about 6.0 percent in March. This decline is largely attributed to February’s storms that delayed many homebuyers from initiating their searches. Housing starts rose in March by 8.3 percent as warmer weather allowed for more ground breaking. The low interest rate environment should continue to encourage potential buyers.

On the corporate scene, the balance sheet picture for the recent fiscal quarter is much brighter as the country’s publicly traded corporations registered increased profits pretty much across the board, above and beyond expectations. There was a notable lack of the gloom that has accompanied earnings reports in recent quarters. Managements remain conservative about their prospects, however.

Attention is now focused on President Bush’s proposed tax cuts. Compromise between the executive and legislative branches seems possible, with suggestions that tax cuts amounting to less than the $700 billion sought by the President are attainable. The situation at the state and municipal levels is more volatile, however, with job and program cuts looming as legislators seek creative ways to balance their budgets.

The stock market showed signs of life in April. The Nasdaq continues to offer relief from three years’ worth of sliding. This largely small- and mid-cap index was up for April. The Dow Jones Industrial Average and Standard & Poor’s 500 Index both showed solid gains for April.

There were no losers among the major sectors in April. Four sectors – consumer cyclicals, financial, industrial and technology posted – double-digit gains.

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The above article is for general information only and is not intended to provide specific advice or recommendations for any individual. Consult your attorney, accountant, or financial or tax advisor with regard to your individual situation.

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