Economic & Investment Update

Presented at S.S.A.P. Chat Live California Insurance Industry Update by Scott Mildrum, Performa

At the end of 2023, JLK Rosenberger sponsored two insurance training events, bringing together professionals across the insurance industry. These full-day events featured presentations by experts covering topics impacting insurance companies, including changes in the reinsurance market, accounting standard updates, regulations, economic trends, and more.

Our team summarized key takeaways from select sessions to provide valuable insights for those unable to attend the events in person. Whether in accounting, investments, tax, compliance, or another insurance specialty, we hope you find these helpful in staying up-to-date on the latest developments and trends in the insurance industry.

A few short years ago, unemployment was low, inflation was minimal, and the economy was thriving. Things were rolling along when COVID-19 arrived. This unprecedented pandemic stopped economic momentum.  After nearly two and a half years of lockdowns, a massive stimulus, vaccines, responses from global central bankers, and a level of herd immunity, the economy started opening back up, and we were beginning to get back to normal. But then inflation kicked in. Commodity price shock hit, energy and oil prices soared, agricultural prices rose, supply chains were in complete disarray, and ships and containers were not in suitable locations, making it impossible to get goods. These factors led to the perfect inflationary storm.

Things started to look up as we began to weather the inflationary storm, but in early 2023, the US experienced some of its most significant bank failures. Our economy has dealt with quite a bit over the last three and a half years.

To remedy these economic obstacles, the Federal Reserve Board (FED) has responded aggressively with 525 basis points of cumulative interest rate hikes since March 2023. Since then, inflation has improved, coming down from the high of about 7% to about 3% now.  In addition to the FED’s reaction, there are other factors driving inflation. Inflation can be divided into three categories: goods and energy, core services ex-housing, and housing. Durable goods and energy were key factors of inflation, as their trend lines were in line with inflation’s. As one increased or decreased, so did the other.  Housing was a different story, as it was a key driver of inflation on the way up but not so much on the way down.  As inflation has come down, housing hasn’t come down and remains relatively high.  Like housing, core services ex-housing was also a key driver of inflation on the way up, but not so much on the way down, as it remains above the FED’s inflationary target. All these factors play a role in inflation, but how much of the decrease in inflationary levels is due to monetary policy, and how much is due to the unwinding of consumer items (i.e., commodity price shock, supply chain disruption, etc.)?  It appears to be a combination of the two.

So, with all the obstacles and bumps in the road over the past few years, what is the economic outlook moving forward? Will it be a soft landing, where economic activity is stalling, the labor market conditions are softening, and there may or may not be a mild recession? Will it be a painful, hard landing where a recession has hit?  Or will there be no landing, where everything will just work itself out?  Only time will tell, but with the S&P 500 up about 20% year-to-date, it appears that the market has taken an optimistic view of things. This optimism likely stems from the following hurdles being out of the way: inflation coming down, the FED pausing at the moment, and the labor market being resilient. Although there is optimism, if the past has taught us anything, it is impossible to predict the future. It has been a wild ride these past few years, and it will be interesting to see what the next few years have in store.