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Experts see slow growth for 2007

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Sam Goldwyn, the famous movie producer, once said, "Never make predictions, especially about the future."

Well, if that were the absolute truth, hundreds of economists and other financial prognosticators would be out of work. Also, as 2006 comes to an end, the annual ritual of placing your bets for the new year is in full swing.

"With the Dow hitting record highs, investors are starting to believe that good times are returning to the country's investment climate," said Craig Pfeiffer, executive vice president at Smith Barney.

The company's most recent Affluent Investor Poll found that two-thirds of the people surveyed said the investment climate is better today compared to a year ago. The number of investors who believe they will be better off financially in the coming months has increased for three months in a row, returning to levels seen earlier in the year.

Investors have been motivated in the second half of this year by falling interest rates, declining oil and gasoline prices, and a strong employment environment.

One trend that has propelled stock prices higher this year has been a rush of mergers and acquisitions. Mergers have been replaced by deals to take companies private. Deals involving just about every segment of the economy have topped $3.1 trillion worldwide in 2006, breaking the old record set in 2000 at the end of the dot-com era.

While deals in the banking and financial services sector are nothing new, the pace of buyouts is likely to continue.

"While many expect the economy to cool next year, we believe 2007 will be another strong year for M&A activity in both banking and insurance. The fundamentals for corporate buyers are still strong, and private equity funds will continue to invest in these sectors," said Todd Williams, partners in the transaction services practice of PricewaterhouseCoopers.

The U.S. economy is facing strong headwinds as it moves into 2007. That opinion comes from the Council of Economic Advisors, the group that provides counsel to the president.

The CEA's current forecast calls for the Gross Domestic Product -- the sum total of all goods and services produced in the United States -- to decline from 3.1 percent in the current quarter to 2.9 percent in the first quarter of 2007.

"The economic forecast clearly reflects that the U.S. economy is moderating to more sustainable levels, firmer labor markets and steady inflation rates," said Edward Lazear, chairman of the CEA.

The report anticipates that national payrolls will grow by 129,000 jobs per month in 2007, and the unemployment rate will hold steady at 4.6 percent, often considered to be a level of full employment.

However, any discussion about the United States and San Diego County economy will be influenced by the 800-pound gorilla, real estate. Three economists who participated in a forum sponsored by the San Diego Regional Chamber of Commerce all agreed that things look pretty solid heading in next year.

However, always present is the unknown direction of residential real estate.

"Looking to 2007, we expect that some regions of the state, including the Central Valley, San Diego and Riverside/San Bernardino regions, will experience sales declines greater the state as a whole. That also holds true for several second home markets, including the desert areas of Southern California and the Wine Country," said Leslie Appleton-Young, chief economist for the California Association of Realtors.

The association's new forecast calls for sales next year to decline 7 percent to 447,500 units and prices will drop 2 percent to a median price of $550,000.

By some measures the CAR forecast is rosy, to say the least. Bruce Norris, author of the "California Crash Report," suggests a sharp decline in sales and prices will have an impact beyond the real estate market.

"How many people will be affected? In some ways we all will be affected. When prices go down we feel less secure about spending. We'll probably go on a few less trips and spend a little less on toys. For some of us, these will be very tough times," said Norris.

But slow growth is better than no growth. And the Council of Economic Advisors believes that the momentum pushing the U.S. economy at the end of 2006 will continue.

"The strong, sustained growth reflected in this forecast will generate solid revenue growth in the year ahead. Coupled with spending restraint, the revenue growth will help us further reduce the federal budget deficit," said Rob Portman, director of the Office of Management and Budget.

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