by Calculated Risk on 12/22/2006 06:07:00 PM

Last year I tried to predict the top economic stories of 2006. I intentionally went "out on a limb", and I definitely missed a few. I'll be doing it again this year. Recession or no recession? I guess I'll have to make a call next week!

But first, a quick review - here are some stories that I thought would not be big in '06:

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

I missed this one big time. WTI spot prices are $62+ today - that doesn't seem too far off, but I completely missed the huge price increase in the middle of '06.

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.

Got that one right. I wish I was wrong about Iraq.

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. Note: I clarified this one - I expected the deficit to stabilize at the Q4 level - clearly the deficit was going to increase in '06.

Looks pretty good. The trade deficit appears to have stabilized at about the level of Q4 2005. However, the current account deficit is still climbing.

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.

This was more of a story than I expected, mainly because the General Fund deficit declined to $434 Billion from $470 Billion in fiscal 2005. I still think the huge story will be in the coming years.

And here are the stories I thought would be big in '06:

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. Stephen Roach recently wrote:

"Alan Greenspan faced a stock-market crash two months after he took over in August 1987. Paul Volcker had to cope with a rout in the bond market three months after he became chairman in August 1979. G. William Miller was challenged immediately by a dollar crisis in the spring of 1978. For Arthur Burns, it was the inflation bogie in the early 1970s."

Missed that one: Bernanke had a crisis free year.

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".

Pretty close.

3) Pension Blowup / Major Bankruptcy Of course I am thinking GM, but maybe it will be another major corporation.

Another complete whiff.

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.

Slow? Yes. Slow substantially? We will need to see the Q4 GDP numbers - right now I think Q4 GDP will be around 2%.

1) Interest Rates ... 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.

I clearly missed the timing of the rate cut, but this prediction was that long rates would rise as the Fed cut rates. We will have to wait to see if that happens.

Here is how the AP ranked the top 2006 stories.