by Calculated Risk on 6/30/2006 09:14:00 PM

Last December I tried to predict the top economic stories of 2006. It's time for a short mid-year review.

I started with four stories that I thought wouldn't be big in 2006:

1) Energy Prices: I expect oil prices to stabilize or decline next year. WTI spot prices closed at $59.96 today.

Oops. So far I've clearly been wrong on oil prices. WTI spot prices closed at $73.52 today, an increase of 22% over the last 6 months. That is a HUGE story.

2) Bush Economic proposals: I think the Bush Administration will be shackled by scandals and Iraq, so I don't expect any major new proposals. I hope I'm wrong about Iraq.

Correct so far.

3) Trade Deficit / Current Account Deficit: I could be wildly wrong here too, but I think the trade deficit will stabilize or even decline slightly next year.

Correct so far, but for the wrong reason. I thought the trade deficit would stabilize at the Q4 levels because the US economy would be slowing down.

4) The Budget Deficit: Although I expect the General Fund deficit to grow to around $600 Billion in 2006, I don't think it will become a huge story until '07 or '08.

Correct so far.

And now my top 5 predictions:

5) The End of the Greenspan Era I think Dr. Bernanke will face a significant challenge in '06, perhaps by one the following top stories - perhaps by something completely unexpected. ... When the challenge comes, expect investors to pine for their lost love: Alan Greenspan.

Bernanke hasn't faced a significant challenge yet, so it is too soon to tell.

4) Housing Slowdown: In my opinion, the Housing Bubble was the top economic story of 2005, but I expect the slowdown to be a form of Chinese water torture. Sales for both existing and new homes will probably fall next year from the records set in 2005. And median prices will probably increase slightly, with declines in the more "heated markets".

So far, so good.

3) Pension Blowup / Major Bankruptcy: Of course I am thinking GM, but maybe it will be another major corporation. Bankruptcy has become a tool to break labor agreements and terminate pension plans. ...

Nothing so far.

2) Slowing Economy: If the US and the World economies slide into recession, this will be the top story next year. I still think it is too early to call, but I do think economic growth will slow substantially next year.

Too early to say. Growth in the first quarter was definitely strong.

1) Interest Rates: Like most investors, I expect the Fed to raise the Fed Funds rate 25 bps at each of the next two meetings to 4.75% in March ... And like many observers, I expect the Fed to start lowering rates later next year as the economy slows. But here is the surprise, I think long rates will start to rise when the Fed starts cutting the Fed Funds rate.

This will be Bernanke's "conundrum"! As the economy slows, this will reduce the trade deficit and also lower the amount of foreign dollars willing to invest in the US - the start of a possible vicious cycle.

Too early to say - the FED hasn't even paused yet.

Summary: Mostly it's too soon to tell. I've clearly been wrong on oil prices and correct on the trade deficit, the budget deficit and the housing market - at least so far.