Dear Mr. Berko:

The economy has been doing very well in the past three or four years. Do you think it can continue in 2007 as the housing market begins to soften? I get all my financial information from Bloomberg Satellite Radio and your column.

G.E., Springfield, Ill.

Dear G.E.:

Most of us feel confident as we enter 2007. A graph of the Dow Jones industrial average will clearly demonstrate that there hasn’t been a down year in the third year of a president’s term since 1939, when Germany, for the second time, decided it wanted to own Europe. That year, the Dow was off just a teensy 3.0 percent.

So since 1939, every year preceding a presidential election has been a winner. In fact, the only significant loss ever in a pre-election year occurred in 1931, when the United States was in the middle of the Great Depression. That year, the Dow was down 52 percent. In today’s numbers, that equates to about 6,000 points — ouch!

In the years preceding the 16 presidential elections since 1939, the Dow has earned an average 17.6 percent return. The worst up-year was 1987, when the Dow was plus 2.2 percent, when Ronald Reagan was running the country; the best up-year was 1975, when Gerald Ford was the quarterback.

Electing a president every four years is a social and economic feast for America. The party in power wants to remain in power, so its members do everything they can to goose the economy — to raise wages, ensure employment, hand out government contracts, approve every sort of government loan and pork-barrel project and flood the economy with easy money. On the social side, Congress approves myriad set-aside programs, panders to religious groups, increases minority hiring, increases appointments to federal positions, expands advertising in foreign-language newspapers and creates business opportunities in minority neighborhoods. Economic numbers are awesome, and government assistance reaches biblical proportions. Therefore, it’s a given that every year following an off-year election will be an up one … so far.

There’s a small possibility that 2007 might buck the trend. The American consumer (a recreational spender) has led the economy and the world into a wonderful era of prosperity. However, Mother Hubbard’s cupboard is out of credits, and we might be spending on empty.

According to economist Gary Shilling, consumer spending has risen at an annual rate of 3.1 percent since 1994. However, real income in the past four years (as measured by the Federal Reserve) has grown only 1 percent. So in order for American consumers to maintain their torrid pace, they have had to refinance their homes and spend their equity loans. Because home and condominium prices are tanking, there’s nothing left to pay those bills or keep the spending on its jolly pace.

Shilling, a Stanford-educated economist, is well-known for his forecasting record. He posits that consumer spending will shrink like a prune, precipitating a recession by this year’s end. He thinks consumers have no alternative but to save more of their current income, and this savings spree will pinch discretionary spending in areas such as appliances, recreational vehicles, travel, hotels, furniture and electronics. On the plus side, Shilling suggests that declining inflation and interest rates will benefit banks, utilities, the brokerage industry and others that have a long and strong record of dividend growth.

Shilling could be right as green grass and sunshine. A prepresidential election year notwithstanding, Washington may not have enough economic goosing power to feed consumer spending through 2007.

However, Shilling represents a minority view and Merrill Lynch & Co. Inc., JPMorgan Chase & Co., Citigroup Inc. plus others are decidedly bullish on the market prospects for 2007.

Meanwhile Bloomberg Radio –with 37 minutes of each hour devoted to advertising, self-promotion, weather, entertainment personalities and sports — is, in my opinion, a poor choice for financial news. Interviews with analysts and corporate leaders are poorly done, stock news is repeated and repeated every hour, and the usefulness of the information seems aimed to the listener with the lowest IQ.

Read The Wall Street Journal, Barron’s magazine or The Economist; listening to Bloomberg for 40 minutes is like listening to Bloomberg all day.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service