Editor’s Note: Mutual of America Capital Management Corporation presents the following review of economic trends prevailing in the fourth quarter of 2002. Comments reflect conditions as of December 16, 2002.

Half full or half empty? That question applies to perceptions about the U.S. economy, which has displayed conflicting signals throughout the fourth quarter of 2002.

Gross Domestic Product increased 4 percent in the third quarter, thanks largely to a surge in automobile sales. The economy, which contracted through 2001's first three quarters, reversed course in the subsequent 12 months, growing by 3.2 percent. As encouraging as that may seem, this figure is less than many economists believe is needed by an economy in recovery. The Federal Reserve, mindful of its role in nursing the economy back to full strength, cut its overnight lending rate by 50 basis points to 1.25 percent in early November, the lowest it has been in four decades. The White House shook up its economic braintrust in hopes of invigorating its attempts to stimulate the economy.

Encouragement came from the U.S. service sector, which continued to expand through November. The service sector accounts for about two-thirds of the domestic economy's output. The manufacturing sector remains a weak link, however, and has shed 185,000 jobs in the August-November period. A possible harbinger of better days is that business spending on equipment and software rose 6.5 percent during the third quarter, the second straight quarterly gain. Spending on computers increased at an annualized rate of almost 50 percent.

Productivity gains have been registered, which may seem promising when taken at face value. The underside, however, is that this has been achieved by pared-down workforces. The national unemployment rate rose to 6 percent in November. New claims for jobless benefits have fallen late in 2002, indicating that the pace of layoffs may have slowed, but the number of people collecting benefits is double that before the recession began. The Conference Board's help-wanted advertising index hasn't improved, either, implying that employers are holding out on new hiring rounds. Since job growth tends to lag a recovery, few economists will be surprised if the unemployment rate continues to rise in the near future.

Understandably, the labor situation has led to pessimism over consumers' ability to prop up the economy through spending, especially during the holiday shopping season. November retail sales were reportedly mediocre, despite post-Thanksgiving discounts. The Conference Board's Consumer Confidence Index ended a five-month descent to a nine-year low of 79.6 in October by rebounding to 84.1 in November.

The housing market refuses to bend, although recent reports suggest weak pockets are popping up throughout the country. Sales of existing homes rose 6.1 percent in October from September, according to the National Association of Realtors. Housing prices for the 12-month period October 2001 through September 2002 rose 6.2 percent, according to the Office of Federal Housing Enterprise Oversight. High vacancy rates among commercial and office space led to a decline in construction within that sector.

The fourth quarter has yielded good news for investors, although the major indices are almost certain to post negative results for the third consecutive year. The Dow Jones Industrial Average, which suffered through six consecutive months of declines through September 2002, enjoyed its second-strongest October percentage gain ever. The Dow's 10.6 percent gain for the month was eclipsed only by the 10.7 percent advance in October 1982. The 10.6 percent uptick also was the Dow's strongest monthly gain since January 1987. The S&P 500 and Nasdaq similarly rebounded well from early October's lows.

Technology and telecommunications were the fourth quarter's heroes, racking up substantial gains. Most other sectors advanced, as well. Exceptions were consumer noncyclicals and utilities, which teetered between being flat or down for the quarter.

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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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