Inflation, the Economy and Workers’ Comp: A Positive Outlook

Inflation is cooling, employment growth is normalizing and the workers’ compensation outlook is good, according to a national economist specializing in workers’ compensation.

The economy and the property/casualty insurance industry are inextricably linked together, said Stephen Cooper, executive director and senior economist at the National Council on Compensation Insurance (NCCI), speaking at the 2024 Annual Insights Symposium (AIS) in May.

“People producing goods and services, the movement of those goods and services, the buildings where those goods and services are stored and sold, all of that is economic activity,” Cooper said. “And that’s what we in the property and casualty industry insure. We’re insuring economic activity.”

When it comes to the economy, numbers and sentiment don’t always align.

While inflation has cast a broad shadow, the economy, as a whole, is in good shape, with a real GDP growth of 3.1% in 2023 and a positive start to 2024, Cooper said.

Labor Market

The labor market remains healthy, with over three million new jobs added in 2023 and a similar pace expected for 2024. That means good things for the property/casualty insurance industry, including workers’ compensation.

Labor market churn has slowed, Cooper said. “The labor market does appear like it is slowing back towards normal.”

Headlines about the labor market tell a story but not the complete story.

While jobs currently exceed the pre-pandemic levels of February 2020, the market has yet to match the pre-pandemic trend.

Cooper said this difference is the gap:

“Where we are in employment today is below where we would have been had we continued to grow along the pre-pandemic trend if the declines had never happened.”

Part of that gap is pandemic-related, Cooper said. People left the labor force because they were ill, had to care for family members who were sick or left because they did not have childcare. But, adjusted for demographics, some of that loss would have happened anyway as boomers reach retirement age and leave the workforce, he added.

Though the numbers have not caught up with where they would be, the growth trend is now in line with the pre-pandemic growth rate. That’s one sign that we can look at to say things are starting to look a lot more normal, he said.

The Economy and Workers’ Comp

Cooper said the economy’s health and workers’ compensation are not a one-to-one relationship, however.

In 2023, payroll grew by 6.2%, well above the pre-pandemic average and the longer-term trend. Wages grew by 3.9% and employment grew by 2.3%. Healthcare, leisure and hospitality, and construction saw the biggest jumps in employment numbers from 2022 to 2023, and wages for each were up over 4%.

However, while construction comprised 6.0% of workers and 7.5% of payroll, the industry accounted for 20.1% of premiums. Combined office employment accounted for 29.0% of employees, 38.9% of payroll and 18.9% of premiums. Large companies that self-insure can skew the numbers as they do not appear in the NCCI system.

“While (construction) is a lower headcount and a lower share of payroll, construction is one of the highest loss cost industries out there, as we think about workers’ compensation,” Cooper said.

Inflation

Inflation has been a concern, with the highest inflation in 40 years. However, it has slowed down in 2023 but remains above the Federal Reserve’s target. While it has slowed down in 2023, it remains near 3.5%.

Medical inflation is a significant factor, including physician care, hospital outpatient care, and medical supplies.

There have been some wild swings over the last few years, Cooper said. “And that’s exactly what we want to see because that’s going to raise the flag for us to dive in and say, what’s going on, what’s impacting this, and is it going to hit us in workers’ compensation?”

Trends in medical inflation have been different than the overall trends.

“They have not followed the broader economy,” Cooper said. “And they haven’t participated as much in the wild roller coaster ride of inflation that we’ve had over the last couple of years.”

Interest Rates

Cooper said interest rates are likely to decrease in the near future.

“Coming out of the great financial crisis, interest rates were driven to zero,” Cooper said. “Quantitative easing was causing interest rates on real terms to be even more negative.”

Rates began to climb slightly in 2017 and 2018, and the Fed took notice and started lowering rates again, even before COVID-19 hit, to prevent the economy from weakening.

Today, interest rates are over 5% at the federal funds rate.

“The question is, what’s the anomaly?” Cooper said. “Are today’s 5% interest rates the anomaly, or were the last 15 years the anomaly?”

The numbers in early 2024 reflect a strong economy, so the Fed has been reluctant to lower interest rates. Weaker payroll reports (at the time of the event), however, may spur lower rates.

“So, if you’re following the interest rate picture in real-time, you’re going to be whipsawed,” Cooper said. But when the bigger picture is considered, the expectation is that the Fed will be biased and reduce interest rates over time slowly, “and the main reason for that is because they don’t want to become more restrictive than they need to on the economy.”

A slow process will prevent having to take more drastic measures later, Cooper said. The economy will dictate how quickly they fall.

“It’s going to depend largely on how evolution in the labor market and how inflation evolves before we’re going to see materially lower interest rates coming through,” he said.

That will keep interest rates higher for longer, “which can be a bit of a boon for us here in the industry with that higher investment income,” Cooper said.

In conclusion, Cooper said that growth in the labor market continues to be strong, inflation continues to decline, medical inflation is more benign, and interest rates will decline slowly.

View the full NCCI/AIS presentation: State of the Economy–The Labor Market & Workers Compensation Video online.

Topics Trends Workers' Compensation