Editor’s note: Mutual of America Capital Management Corporation presents the following review of economic trends prevailing in the second quarter of 2003. Comments reflect conditions as of June 17, 2003.

The domestic economy began showing some positive indications in the second quarter of 2003. Throughout the first quarter, tensions over the military buildup in Iraq contributed to the economy’s inability to move forward. When it became clear early in the second quarter that the coalition forces were successful in forging a regime change, the wait was on for clear signs that the U.S. economic picture would brighten. The economy is not yet out of the woods but appears headed in the right direction.

Federal Reserve Chairman Alan Greenspan said in early June that the U.S. economy has enjoyed a “fairly marked turnaround” in the last two months, in that downward trends have stabilized, although there is yet to be a positive acceleration. He cited economic statistics and the stock market’s bullish tendencies, but observed that the U.S. labor market remains “exceptionally” weak. While recent labor statistics indicate this may be a jobless recovery, the economy appears to be expanding, albeit slowly.

First-quarter gross domestic product numbers were released in late May and showed the economy to have been slightly stronger than originally estimated. Real GDP grew 1.9 percent annualized for the first quarter of 2003, up from the 1.4 percent registered in the fourth quarter of 2002. Published reports quote economists as expecting second-quarter GDP growth to approximate that of the first quarter, with the expectation of more solid growth coming in the third quarter of 2003.

Although the pace of layoffs has slowed somewhat, the number of Americans who continue to draw unemployment insurance remains stubbornly high. The four-week average of initial unemployment claims remains above 400,000, which economists use as a threshold – below 400,000 would indicate that the situation is improving. Any figure above 400,000 is indicative of weakness in the labor market. The Conference Board’s Help Wanted Index, a key barometer of America’s job market, continued to decline, falling to 35 in April from 38 in March and 40 in February. The figure for March 2002 was 47. Despite the labor situation, the Conference Board’s Consumer Confidence Index is headed in a positive direction. The Index increased sharply in April and posted a moderate increase in May.

The Consumer Price Index has now fallen for two straight months, partially due to falling energy prices. Energy prices recently reclaimed the large increases recorded prior to the military action in Iraq. The Producer Price Index, which measures pricing at the wholesale level, fell by a record amount in April. Many companies find themselves unable to raise prices in this environment, which inhibits the hiring of new workers. The threat of deflation in the economy has been discussed lately. Mr. Greenspan called this threat “minor,” but admitted that it deserves close scrutiny and possible Fed action.

First-quarter corporate profits rose by 1 percent from the fourth quarter of 2002 on a seasonally adjusted basis. Profits are now well above the amount at which they bottomed out in 2001, although they still have a way to go to approach their 1997 high.

The equity markets have responded to the favorable economic news with increases in the second quarter. This performance has occurred across the board but has been most pronounced in the Nasdaq, which is up more than 20 percent for 2003. In early June, the Dow Jones Industrial Average finished a session above 9,000 for the first time since August of last year. All sectors shared in the bullish attitude, with increases most pronounced among the consumer cyclical, financial, industrial, technology, telecommunications and utilities sectors.

Source: The Wall Street Journal

U.S. Treasury rates fell to near record lows over the second quarter as Chairman Greenspan gave indications that the Fed would cut the Fed Funds rate. Mr. Greenspan’s discussion of the risk of deflation caused longer-term rates to fall without any overt Fed action. This stimulus in the form of lower rates is being felt directly in the mortgage market, where refinancings remain at record highs, helping the consumer. Corporate bond yields have fallen even more than Treasury yields as investors have bought up corporate debt, providing stimulus to corporations.

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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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