Editor’s note: Mutual of America Capital Management Corporation presents the following review of recent economic trends. Comments reflect conditions as of August 20, 2003.

The U.S. economy grew at a 2.4 percent annual rate in the second quarter of 2003, compared with 1.4 percent growth in the first quarter, according to the Commerce Department. This growth is attributed primarily to the largest increase in defense spending since the Korean War. Consumer spending, which propped up the economy for several years before sagging last year, rebounded to its highest rate since 2002’s third quarter. Business investment also enjoyed its largest increase in three years. The Conference Board’s U.S. Leading Index increased 0.1 percent in June, the third consecutive increase.

Federal Reserve Chairman Alan Greenspan promised to keep interest rates low for as long as it takes to help support consumer spending and corporate borrowing. The Fed announced that it expects growth in the range of 2.5 to 2.75 percent this year, reaching 4.0 percent in 2004, with inflation holding beneath 1.5 percent this year. The Fed’s assessment of the larger picture is that growth has improved, due to productivity advances and improved U.S. exports resulting from the weakening dollar, but that considerable slack remains. The Fed attributes this slack to businesses choosing to take advantage of low interest rates to restructure their balance sheets, rather than to finance purchases of new equipment or facilities.

Productivity rose 5.7 percent in the second quarter, with domestic non-agricultural businesses increasing output with fewer workers. This is the fastest productivity growth in three quarters. At this rate, 91 workers can now produce what 100 workers did in March 2001. Therein lies a major problem plaguing this economy, the lack of job creation. While increased productivity is a positive for the economy, it also exacerbates the problem of anemic job creation.

Although the country’s unemployment rate dropped to 6.2 percent in July from 6.4 percent in June, caution flags were raised as many of the long-term unemployed have dropped out of the labor market and, thus, are no longer counted for statistical purposes. The number of people filing initial jobless claims continues to drop. The recent decline in the four-week moving average indicates that more jobs are being created than are being removed. The Conference Board’s Help-Wanted Advertising Index increased three points to 38 in June from 35 from May. The Index had been at 47 in June 2002.

Manufacturing rebounded a bit in July. The Institute for Supply Management’s index rose to 51.8 from 49.8 in June, the highest reading since January’s 53.9. A reading over 50 in the survey of business firms shows that the majority believes that business is getting better or at least not worsening. A Federal Reserve release also showed that industrial output increased 0.5 percent in July, the largest increase since January 2003. This parallels an increase for durable goods orders in June, the largest monthly gain since January. There is still plenty of idle capacity in the nation’s factories, however, as figures show utilization at a 20-year low.

The housing market remains resilient. Sales of new homes jumped 4.7 percent to a record 1.16 million units in June. Sales of existing single-family homes fell slightly in the same month.

Inflation remains tame. The Consumer Price Index rose 0.2 percent in both June and July. June’s increase was the first in three months. The CPI is up 2.1 percent on a year-on-year basis, while the core rate (which excludes food and energy costs) is up 1.5 percent for the same period. Producer prices rose just 0.1 percent in July.

Retailers provided good news as sales increased 1.4 percent in July, on top of a gain of 0.9 percent in June. July’s figures represented a 5.6 percent increase from July 2002. Automobile sales were largely responsible for the increase, reversing a June decline. Gasoline, electronics and household goods sales also were strong. These figures clash with the Conference Board’s Consumer Confidence Index, which declined in July after remaining practically unchanged in June. The Index dropped to 76.6 from 83.5 in June, which was attributed to the stagnant job market.

Corporate profits were also a source of optimism. Second-quarter net income rose 63 percent among companies tracked by Dow Jones & Co. and comes close to the record highs set in the second quarter of 2000.

As of this writing, the stock market remains in positive territory for 2003. The three major indices are all currently showing double-digit gains for 2003, led by the Nasdaq. The S&P 500 and Dow Jones Industrial Average are also rewarding investors at this time. Small-cap stocks have outperformed mid-caps, which have done better than large-caps. The leading sectors for the second half so far have been basic materials and industrials. Consumer cyclicals and financial issuers are also up, with the remainder either basically unchanged or down.

Source: The Wall Street Journal

The fixed-income markets have seen much turbulence lately, with some of the most dramatic yield swings in history. Yields rose as bond prices were pushed lower on news of improved economic forecasts (with the possibility of consequent inflation and higher interest rates) and the Fed’s unwillingness to purchase Treasury securities with longer maturities as a means to lower interest rates. These high yields are a turnabout from 45-year lows reached in the spring. Yields in the short end of the yield curve have risen more slowly than securities of longer maturities, which reflects expectations for low interest rates to stay that way for the foreseeable future. The spread (or difference in yield) between notes of two and 10 years to maturity, reached highs that haven’t been seen in over 20 years.

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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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