Editor’s note: Mutual of America Capital Management Corporation presents the following review of economic trends prevailing in the second quarter of 2001. Comments reflect conditions as of June 15, 2001.

The U.S. economy faces strong headwinds in the form of plunging capital spending, weakening foreign economies and a stronger dollar as it trudges along, skirting a recession.

Consumers, who continue to spend more than they are earning, have kept the economy going, despite a capital spending slowdown. Whether burgeoning debt levels, corporate layoffs and a volatile stock market exhaust the consumer before capital spending recovers is the crucial issue.

The Federal Reserve (the Fed) has now lowered the target Fed Funds rate by a whopping 2.5 percent in less than five months. Clearly, the Fed saw substantial risks to the economy. Markets continue to await signs that this aggressive policy action is having the desired effect. Gross domestic product (GDP) for the first quarter grew by a paltry 1.3 percent, so it appears that we have avoided a recession so far. Economic data, however, continue to depict an anemic economy.

The labor markets are deteriorating and the technology sector is in terrible shape. The downturn in corporate investment is contributing to declining profit margins, leading to layoffs. Further job losses remain the risk, and this would feed into psychology that would curtail consumer spending, which is two-thirds of GDP.

For now, the risks remain toward a continued weakening in the economy, especially if the consumer stops spending due to a deteriorating labor market. Although Fed rate cuts help banks almost immediately, the benefits to others are neither clear nor immediate. Higher energy prices, which are like a direct tax on consumers, will exacerbate the situation.

The stock market has shown resilience during the first two months of the second quarter. The market, as measured by the S&P 500, rose more than 10 percent early in the second quarter. No clear leaders dominate this upward movement as investors seek earnings reliability and growth in fundamentally sound companies.

The stock market is driven by earnings, and analysts who follow S&P 500 companies anticipate the hoped-for recovery in earnings to be delayed until at least the fourth quarter of this year, as negative earnings announcements continue to dot the landscape.

Under current circumstances, where there is no clear leader among sectors or companies, investors seek steady, not necessarily accelerating, growth. Smaller capitalization stocks often do well in this type of market. Early in June, the Russell 2000 was outperforming the larger-cap S&P 500. The strongest performers can be found in the mid-cap index, where many steady growers are perched.

The situation overseas is not encouraging. The outlook for Japan’s economy is particularly weak, with the economy showing signs of slipping back into recession. Meanwhile, Japan is gripped by a mild but persistent deflation as policy makers pursue necessary structural reforms.

In Europe, the weakness of the Euro continues to push inflation, now running at 2.9 percent, much higher than the ceiling of 2 percent imposed by the European Central Bank. The Bank, therefore, has been reluctant to lower interest rates, and the economy continues to languish. While our Fed has lowered rates by 2.5 percent, the European Central Bank has lowered rates by a scant 0.25 percent.

The International Monetary Fund (IMF) has poured over $14 billion this year alone into Turkey, and many billions into Argentina last year. This same type of support was a major contributor to the Southeast Asian/Russian crisis of 1997/1998.

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.

Mutual of America Life Insurance Company is a Registered Broker-Dealer.