ABCs of the economy in 2007 

With the height of the holiday season nearly behind us, attention turns to what’s happening in the new year. Topping the list is the direction that the national economy is taking — where are we heading?

Here are the ABCs of what could affect the economy — for good or ill — in 2007:

A

Afghanistan: If we lose our grip there to the resurgent Taliban, it will be a huge embarrassment to the administration and bad in terms of economic confidence. Apple Computer Inc. (AAPL): What will Steve Jobs announce in the first quarter? A real-deal phone with music will be a big deal; but also watch out for a stock-option backdating surprise right at the turn of the year.

B

Bush: Will he embed us deeper into Iraq? Will there be a constitutional crisis over the funding of what may be his proposal to add significant troop numbers, not for a "surge," but for the long haul though 2008? The stock market believes we are going to get out of Iraq substantially before the next U.S. presidential election; any news to the contrary will be bad for

equities.

C

China: Will its economy continue to grow and will it revalue its currency upward by mid-year? Will the U.S. take it to the World Trade Organization (possibly forced by Congress)?

D

Dollar: Will the dollar continue to trend down softly (so as not to cause a panic and to help the Federal Reserve hold steady interest rate policy?) Will the deficit renew its upward climb with Iraq to cost more than $2 billion a week? Will the Democratic Congress go back to pay-as-you-go, Clinton-era spending caps (good for the financial markets)?

E

Energy: Will oil be re-priced in euros because of a shrinking U.S. dollar, or will it merely trend upward as it did this year?

F

France: Will it elect its first female president, a socialist ... and will that be bad for the euro, good for Hillary?

G

GDP: Will U.S. gross domestic product fall to less than 3 percent annualized growth (no big deal), less than 2 percent (which could mean lower interest rates by summer) or less than 1 percent (look out below, here comes election-year recession)? Or will there be an upside resurgence surprise (near 4 percent) which would prove Fed Chairman Ben Bernanke right again and enhance his credentials, but would also mean higher rates by next

fall?

H

Housing: Will home prices stabilize and then begin to rebound by the second half of 2007, or continue to fall? I’m betting (with Bernanke) that the former is the case.

I

Iraq and Iran: The biggest issue of the year regarding the U.S. economy. A debacle in Iraq would significantly undermine market confidence. And when will the Fed start cutting interest rates? With immigration, will Bush and the Democrats push through a guest-worker program, and at the same time open the door to more high-skilled visa permits? The latter would be very good for U.S. tech shares.

J

Jail: Who will do time for stock options backdating? Japan: Will its economic resurgence continue to provide some push to global growth?

K Korea: A breakdown in the current talks could hurt overall geopolitical environment and thus the global share markets.

L

Layoffs: A slower economy feeds on itself, and this would be the first sign that things are not going well. LBOs: Will leveraged buyouts continue to privatize the U.S. equity capital market in the wake of Sarbanes-Oxley and option reporting burdens?

M

The Middle East: here, speaking of Israel/Palestine/Lebanon/Syria. If matters get even worse, it will be unsettling to both the U.S. and European share markets and possibly currencies as well.

N

Nigeria: Oil prices could really be hit hard if troubles here bubble over.

O

Obama: Will the Illinois senator run and throw all sorts of "settled" political calculations for 2008 (Hillary) out the window, inducing more market volatility toward year’s end?

P

Pelosi: How will she govern? From the center would be good for markets; from the left would lead to increased volatility — good for traders, bad for shareholders.

Q

(al)-Qaida: A big terrorist attack would rout the markets.

R

Russia: What price stability? Will it continue to play gas politics, and will it cooperate on Iran’s nuclear issues? Will there be a coup attempt?

S

Saudi Arabia: Will it play a constructive role, or will the kingdom be wracked by its own unrest (bad for oil prices, of course)?

T

Taxes: Fix the Alternative Minimum Tax, or there goes upper-middle-class consumption.

U

Uranium: Hot commodity of the year!

V

Venezuela: Pot-stirring by Hugo Chavez could destabilize investor confidence in all Latin shares, especially if Castro dies and Chavez attempts to seize the revolutionary mantle. Variable rate mortgages: Could pose real trouble if the Fed is forced to raise rates for some reason other than rapid growth of the

economy.

W

Water: The second hottest commodity in 2007.

X

For extremists — terrorists by another name, but really a broader category of folks who can cause havoc anytime anywhere, and not limited to al-Qaida. Indonesia is always vulnerable, and so is the U.S. — but more to another Timothy

McVeigh-type attack. Even that kind of terror strike would cut 1,000 points off the Dowbecause of the collapse of the invulnerability illusion priced to current share values.

Y

YouTube: More properly, generation Y — what will be its next YouTube story? The Web continues to save us from recession, along with military spending and a high prison population that keeps the official unemployment rate down and helps create the sense of a really strong economy.

Z

Zero-based emissions: Alternative energy will get another big push in the State of the Union, and this time the Democratic Congress may see Bush and raise him on it. This area is the new biotech.

Terry Connelly is dean of Golden Gate University’s Ageno School of Business.

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