Public companies did surprisingly well in 2006, with positive returns for large and small companies in an economy that began the year expanding at a 3.7 percent annual rate and ended the year at 3.1 percent.

Housing was the big weak spot in 2006, with new home sales dropping to a 1.06 million annual rate from 1.283 million in 2005 — a decline of 17.3 percent. Housing starts fell an estimated 12.9 percent to an estimated 1.80 million annual rate.

Calvin Cruce/AJC (ENLARGE)

Housing starts dropped 12.9 percent in 2006.

The U.S. Bureau of Economic Analysis said this weakness was offset somewhat by accelerated exports, increased inventory investment, nonresidential construction, and state and local government spending.

But the Federal Reserve's regional economic reports — the Beige Book — showed slowing real estate markets and rising inventories in all Fed districts, although some were worse than others.

The cost of energy was a major problem last year, especially for consumers who saw gas prices at the pump rise, fall and rise again during the year. After reaching a high of $78.40 per barrel in July, oil prices trended lower to close the year at a still-high $61.05 — about the same as the end of 2005. Gasoline reached a U.S. high of $3.04 per gallon in August and ended the year at $2.34, up 14 cents per gallon year-over-year.

President Bush in February 2007 outlined new U.S. energy goals, aimed at replacing 75 percent of imported oil with ethanol by 2025. This has stimulated increased investment in alternative energy sources.

One of the most important events of 2006 was the change at the top in the Federal Reserve. On Feb. 1, economist Ben Bernanke took over the chairman's job from Alan Greenspan, who had been chairman since 1987 — and had led 14 straight interest rate increases starting in June 2004.

Under Bernanke, the Fed raised its overnight federal funds rate three more times from 4.5 percent, stopping at 5.25 percent on June 2006, where it has been since. While the economy has cooled in the past year, the Fed has maintained its "inflation risk" posture toward any lowering of rates.

Economists showed concern that without a rate cut, the overall economy would dip into a recession, a prospect that seemed to increase when the yield curve inverted. That's when yields on short-term Treasury bonds are higher than yields on longer- term bonds, which typically are higher in order to attract investors to put money in longer maturities.

On Wall Street, the ongoing string of strong quarterly corporate profit reports boosted the major stock indexes: the highly publicized Dow Jones industrial average by 16.3 percent, the broader Standard & Poor's 500-stock index by 13.6 percent, the technology-weighted Nasdaq composite index by 9.5 percent and — outdistancing all the others — the Russell 2000 index of smaller stocks by 17 percent.

The Bloomberg News index of Georgia stocks posted a highly respectable advance of 12.8 percent, probably because of the preponderance of smaller companies in the state.

Wall Street experienced the largest number of mergers and acquisition deals in history last year, topping the previous 2005 record by 38 percent. This was mostly because of the increased number of private equity deals, the availability of low-interest-rate credit and cash-rich corporations. Businesses had hoarded their money for years prior to 2006.

Worldwide deals topped $3.79 trillion in value, with the United States in the lead. The biggest was AT&T's acquisition of BellSouth valued at about $67 billion when the deal was announced. The top leveraged buyout/private equity deal was the purchase of HCA, the largest hospital operator, for $21.2 billion by a consortium of equity investors.

The market for initial public offerings also continued to recover, rising 20 percent compared with 2005. The best-performing IPO was by the $2 billion MasterCard credit card company, recording a return of 159.1 percent for shareholders.

Politics also had implications for the economy and the markets in 2006, as Democrats took control of both houses of Congress from Republicans in the off-year election. The war in Iraq, in its fourth year, was the main factor in this shift, although political gurus also cited political scandals, health care and immigration as other big voter issues.

Democrats immediately proposed an increase in the federal minimum wage, a lowering of student loan costs, and enabling Medicare to negotiate drug prices, among other initiatives.

The background issue remained the war in Iraq, where U.S. and other forces were embroiled in a civil war between sectarian religious groups in that Middle East nation. Debate about withdrawal of U.S. troops, which propelled the Democrats to power in Congress, did not slow.

The Israel-Lebanon conflict, Iran's promise to develop nuclear power and North Korea's claim to an atomic bomb alternated with Iraq in the headlines, often jarring the stock market. Domestically, immigration, focusing on illegal Mexican immigrants, was a dominant and long-running controversy.

Apparently, no year would be complete without a corporate scandal, and in 2006 the big one was options backdating. That's the practice of companies awarding stock options to executives bearing a date that is advantageous to the recipient.

The practice is not illegal, but failure to disclose backdating is, and that's where companies got into trouble, with hundreds of cases being investigated by the Securities and Exchange Commission.