Editor's note: Mutual of America Capital Management Corporation presents the following review of economic trends prevailing in the second quarter of 2002. Comments reflect conditions as of June 15, 2002.

Different quarter, same theme -- consumers are spending, businesses aren't. At least the recession has been declared over and a mood of cautious optimism is prevailing. First quarter gross domestic product grew at a 5.6 percent rate annualized. Treasury Secretary Paul O'Neill predicted 3 percent growth through the rest of the year. The National Association for Business Economics (NABE) survey forecast growth of 2.8 percent for the rest of 2002, a nearly twofold increase over its prediction of just three months ago.

Consumers are still reaching for their wallets, although a little less often than has been the case in recent years, due to declines in employment and hours worked. Not surprisingly, personal bankruptcies were reported up. Still, retail sales surged in April, led by strong sales of cars, gasoline and building materials. The Conference Board's consumer confidence index fell in April, then edged back up in May. Its Help-Wanted Advertising Index dipped in March, down more than 25 percent from a year earlier, confirming continuing weakness in the job market. Sales of existing homes continued to surge at near-record levels. Home prices were up 8 percent over a comparable period last year.

The Consumer Price Index rose 0.5 percent in April, due largely to price increases in energy (gasoline up 10 percent) and tobacco (up 6.5 percent), whereas wholesale prices fell in April, including the biggest drop in food prices in 28 years. Federal Reserve Chairman Alan Greenspan dismissed the potential for economic damage that could be brought about from hostilities in the Middle East and consequent OPEC price increases. He said that oil prices would have to rise sharply to significantly impact the economy.

Corporate profits improved slightly in the first quarter of 2002, the second straight quarter of growth after four quarters of declines. These profits, however, are probably not yet healthy enough to encourage companies to spend heavily again on employees and new equipment. NABE said capital spending is likely to fall by almost 5 percent this year (as against a 3.2 percent decline last year). This should help to keep interest rates low for most of the second half of 2002. NABE doesn't see significant increases in corporate profits and capital spending until 2003. Inventories are at a 30-year low, which could presage a flurry of stocking up in the near future. While output at the nation's factories, mines and utilities rose 0.4 percent in April (the fourth straight monthly increase), industrial production is now 2 percent lower than it was a year ago. The real money supply has been shrinking. The cost of doing business, as represented by the Conference Board's lagging index, has been steeply declining and points to continued improvement in near-term economic conditions.

The U.S. dollar has weakened against the world's currencies, especially the euro and the Japanese yen. Foreign investment flow over the past decade has provided huge support for the dollar, and this flow is now decreasing. The fragility of the U.S. economy and the inability of our stock market to gain ground have contributed to the dollar's weakness. This decline could negatively impact stock prices and lead to a rise in interest rates. While the dollar was strong, inflation was contained via low import prices, making it harder for U.S. producers to raise prices. A weak dollar could benefit the economy by boosting overseas demand for U.S.-based companies that produce goods for export.

Equities have yet to regain investors' confidence. The second quarter found all the major indexes trending downward. The Nasdaq Composite, especially, has been hammered in the second quarter. It was down more than 20 percent for the year by mid-June, after finishing the first quarter down 4.5 percent. Continuing investigations by law enforcement and regulatory authorities of corporate accounting practices and various ethical breaches have stymied upward movement of any duration. Government talk of the "inevitability" of future terrorist attacks in the United States dampened the mood, as well. Positive news vis-à-vis corporate profits would go a long way toward reversing the downward spiral.

Noncyclical consumer goods was the only sector to hold its ground in the second quarter. The most significant decline was experienced by the technology sector.

The world's attention remains focused on two sources of tension that could ignite into full-scale war, with larger implications. War drums are beating in India and Pakistan, while hostilities between Israelis and Palestinians wax and wane based on the frequency of suicide bombers and the amount of casualties. Should either situation get out of control, U.S. attempts to maintain a cohesive anti-terror coalition could rapidly unravel.

European economies may have rounded the corner. Germany, the continent's largest economy, came out of recession, although its reliance on exports and unwillingness of its consumers to spend at home highlights its tenuous position. Italy, Spain and the United Kingdom enjoyed economic growth, although France is yet to get up to speed with its neighbors.

The European Central Bank (ECB) is betwixt and between. Low interest rates have given rise to moderate inflation. The ECB could raise interest rates to stem inflation, but this could imperil economic growth. High oil prices and weak consumption are the main impediments to economic health in Europe.

The situations in Asia are like night and day. Korea's economy continues its ascent, while Japan remains mired in quicksand. Japan's coincident index, a barometer of current economic activity, is at a 14-year low, and wholesale and retail sales there are trending downward.

In the Southern Hemisphere, Argentina's currency crisis is nowhere closer to resolution than it was earlier in the year. The Australian economy remains strong, thanks to consumer demand and exports.

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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