2017 Economic forecast: Optimism and bubbles [VIDEO]
UMB Bank's chief investment officer KC Mathews sheds light on bubbles, GDP and interest rates
Economic bubbles by themselves are not cause for alarm. The question KC Mathews poses in UMB Bank’s 2017 economic Forecast:
Will those rational bubbles become irrational?
“I do think the economy has momentum that will take us into 2017 and perhaps trickle into 2018,” the UMB chief investment officer told an audience of Denver businesspeople in mid-February, one of several stops on the annual UMB Economic Roadshow.
“When you think about the potential pro-growth initiatives we may see from our new president, I think you can get something like 2.5 parent real GDP growth in the U.S. in 2017.”
Mathews dose see bubbles forming in some areas, but for the most part, they’ve been justified. He sees the stock market – the S&P 500 – as fairly valued at 17 1.2 times forward earnings.
“Could there be a bubble developing in the stock market? Could be, but it’s rational and far from that bursting or popping phase.”
That might not be the case with interest rates.
“Quantitative easing drove rates down to virtually zero for six years, and yet our economy since the Great Recession has grown at an average of about 2.1 percent, using real GDP as a barometer,” Mathews said.
“You shouldn’t have interest rates so low with the economy growing at 2 percent. So I think you’re going to see interest rates rising. I think our central bankers will figure out a way to manage the glide path higher, and maybe deflate the bubble without having that bubble pop.”
Indeed, the Fed raised its key short-term interest rate to a range of 0.75 percent to 1 percent in March.
Similarly, housing prices on a national level don’t concern Mathews, as they remain 5 percent to 10 percent below prices before the Great Recession.
Denver is another story.
“In Denver, you see housing prices growing at 10 percent – twice the national average rate,” Mathews said.
“Why? You have a vibrant economy, you have great jobs available, tight labor market, great climate, and you have a great migration of people into the state and into the city of Denver. Because of that, you have a supply and demand problem. Housing prices have escalated in Denver much faster than the national average. You still have the migration. So I think, again, it might dissipate before it pops.”
Mathews sees a couple of uncertainties with the Trump administration. One is trade policy. Another is immigration.
“We don’t know exactly what his plan is on trade,” Mathews said.
"Global trade is positive for job growth, for creativity, ingenuity and things along that line. Protectionism is bad. Building walls, whether literally or metaphorically, typically is bad.”
“What will happen with trade? Nobody really knows, but you would hope at the end of the day cooler heads will prevail.”
Mathews’ view of immigration is similar
“We need immigration to support our labor force, our growth rate,” he said.
“We cannot close our borders. We’ll just see what [Trump] does with it. But that could hamper economic growth if there’s some type of misstep.”
Trump’s vow to reduce regulation that escalated over the past eight years should help the economy,” Mathews believes, if the president follows through.
“President Trump has stated he’d like to reduce regulation by 75 percent,” Mathews said. “Even if he just reduces regulation by 10 percent, that would be a positive for heavily regulated sectors such as finance, health care, energy.”
The UMB economist reiterated his belief that signs point to a healthy economy in 2017. “No doubt, like every year you’ll have some bumps in the road,” he said. “We’ll have ebbs and flows in financial markets. But at the end of the day, business conditions have improve dramatically from the beginning of 2016, not only locally but on a global scale.”