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New Year Special: Top 10 Forecasts

Top 10 Forecasts for 2007
Here are a few: An early pause warms to 3 percent economic growth by yearend even as the deficit grows. Gas down a bit; electricity up. Home sales pick up by midyear.

Top 10 Forecasts for 2007
The year ahead promises to be a tumultuous one for the economy, energy, housing, autos, stocks, Iraq, Congress, the budget, America’s image, and politics.
Here’s how we see 10 key issues playing out and where things will stand as next year winds down.

U.S. economy: An early slowdown in growth will be just a pause, not the start of a long slump. Orders for many industrial goods will remain weak through the first six months because of production cuts by U.S. automakers and the sluggish housing market. Business spending is likely to remain soft, too, but consumer outlays won’t take a big hit
By the end of 2007, the economy will be growing at a 3% pace ... or close to it ... vs. about 2% now. After midyear, the negative impact from both autos and housing will begin to recede. Moreover, a low dollar will boost export sales. And continued, albeit slower, employment gains plus inflation-adjusted wage gains will keep most consumers shopping.
Interest rates are going to hold steady well into the year. The Fed is confident that the economy has enough underlying strength to keep short-term rates at current levels. The prime will stay at 8.25%.

Energy: Consumers can count on some relief from high prices, but you may hardly notice. Prices of crude oil, gasoline, and natural gas will slide a bit as U.S. and global economic growth downshift. However, higher coal costs for utilities spell rate hikes for electricity users.
At year end, we expect the price of oil to be about $60 a barrel, with gasoline averaging $2.30 a gallon, a nickel below today’s average.

Housing: Home builders will breathe easier a year from now. By then, the sharp downward corrections in construction and home sales will have run their course. But don’t look for the boom to resume ... heady speculative activity won’t return. So look for home price gains in coming years to be fairly modest. Starts for both single-family and multifamily homes will be 1.5 million or so, vs. 1.8 million in 2006.
We believe the worst of the slump is over. But home sales and prices will keep declining, though at a slower rate, until midyear.

Autos: Detroit as a whole won’t look much healthier by yearend than it does now, despite a landmark deal with the United Auto Workers on a money-saving new contract. The agreement will help, of course, but U.S. automakers must still design models more consumers want to buy.
You’ll hear much more about Toyota, which will end GM’s reign as the world’s leading automaker next year and zoom past Ford to become No. 2 in U.S. sales after GM. The outlook for the "Big Three": GM’s future will brighten a bit next year, while Ford’s will grow dimmer. As for DaimlerChrysler, formed in 1998 ... louder whispers about a divorce.

Stocks: Another strong year, but with lower gains than in 2006. The S&P 500 will top its March 2000 high of 1527, increasing about 10% vs. this year’s rise of about 14%. A 2% dividend will bring total returns to 12% in 2007. (This year ... 16%.) The Dow, which reached a new high in 2006, will also continue to climb, but not as much as this year.

Congress: Lawmakers won’t have much to show by year end, even though the new Democratic majorities in the House and Senate will make a big display of hitting the ground running in coming weeks.
Best bets: Immigration reform. An increase in the minimum wage. Tougher lobbying regs. A flood insurance overhaul. A water projects bill.
But Congress will at least advance the ball on other bills, including farm legislation and a fix for the alternative minimum tax.

The federal budget: The deficit will be larger, not smaller, a year from now, despite pledges by Democratic congressional leaders to curb spending. Odds are the deficit is going to top $300 billion, about 25% higher than the current number, because the slowing economy will crimp tax revenue while defense and entitlement spending will rise. Even so, the budget deficit in the next fiscal year will be about 2.1% of GDP, lower than the historical average of 2.3% over the past 40 years.

Iraq: At best ... an only slightly grimmer situation than now. President Bush is likely to order up to 30,000 more troops to Iraq soon. But the coming effort is sure to be too small and too short-lived to make any lasting difference in attempts to break the Sunni insurgency and to protect Sunni civilians against attacks by Shiite militias.
By fall, look for a modest drawdown in total U.S. forces in Iraq. Many of the remaining troops will be shifted toward advising and training Iraqi soldiers and away from independent combat roles.
But the U.S. will still be shouldering most security duties in a year because uniting Iraqis into one fighting force won’t be easy.

America’s image abroad: One year won’t make much difference. Clearly, ill feelings over the Iraq war and what some foreigners view as Bush’s heavy-handedness in dealing with other nations won’t go away until after Bush leaves office. But don’t believe all of the talk claiming that the U.S. is permanently tarnished. Even some naysayers know that the U.S. and its way of life will remain a beacon for many.

Presidential politics: Who will be the front-runners by 2008?
Same two as now ... Sens. John McCain and Hillary Clinton. Don’t count out the others just yet, especially Sen. Barack Obama (D-IL) and outgoing Mass. Gov. Mitt Romney (R). But McCain and Clinton have many advantages and will fight hard to maintain the inside track.

Happy New Year