Economic forecast: Optimism amid bubbles.

• Author: Taylor, Mike
• Position: STATE of the STATE

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, 1 think you can get to something like 2.5 percent real GDP growth in the United States in 2017."

Mathews does 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."

Similarly, housing prices on a national level don't concern Matthews, 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...