U.S. Macroeconomic Indicators Vol IV, Issue 3

In this Section

Is The U.S. At Risk For Stagflation In The Second Half Of 2025?
What To Expect From A Softening Commercial Insurance Market
The Race For Scale In Mid-Market Insurance Brokerage M&A

Is The U.S. At Risk For Stagflation In The Second Half Of 2025?

Stagflation is a unique and challenging economic condition where high inflation, high unemployment and stagnant economic growth converge. Stagflation represents a challenge to policymakers because the tools to fight each condition tend to worsen the other conditions.

Could a combination of heightened inflation and slowing economic growth raise the risk of stagflation in the U.S.? In early 2025, some analysts expressed concern as they considered the potential impact of renewed geopolitical tensions and President Trump’s “Liberation Day” tariffs. While recent data has indicated resiliency in the U.S. economy – persistent inflationary pressures, ongoing trade and geopolitical conflicts, and possible slowing growth could potentially create a stagflation scenario. That’s something the U.S. hasn’t experienced since the 1970s when high inflation and stagnant growth were driven by an oil crisis, monetary policy that may have worsened inflation, and wage and price controls.

Key differences between the 1970s stagflation environment and today

When comparing 1970s stagflation with today’s economic conditions, several critical differences emerge:

Fuel prices: In the 1970s, geopolitical tensions in the Middle East led to dual-energy shocks, with a surge in oil prices of more than 300% year-over-year in 1974 and 180% in 1979, creating a steep rise in prices at the pump and gas shortages. While the U.S. is also currently facing geopolitical conflicts fueling an uptick in oil prices today, the increase has been much more moderate. At the end of July 2025, Brent crude oil futures rose to a five-week high but remained below the spike seen in 2022.¹ Prices are reacting to increased pressure on Russia to end the war in Ukraine. However, due to the ramp-up in U.S. oil production, an increase in oil prices is less likely to impact the U.S. economy.
Higher unemployment: Unemployment rates in the 1970s were at the mid-to-high single digits during that decade, rising to over 10% in 1982. By contrast, today’s labor market is more stable, with July’s unemployment rate at 4.2%. However, job growth slowed in July to 73,000 jobs added, below expectations for 104,000. There were also downward revisions of 258,000 jobs combined for May and June, indicating that prior job growth was not as strong as previously thought.²
Risk of recession: While there were two recessions in the 1970s, real GDP growth for 2025 is forecasted to be 1.4%. Forecasters surveyed by the Federal Reserve are also projecting positive, albeit moderating, economic growth for the next two years, with 1.6% real GDP growth in 2026 and 2.2% in 2027.³

Where is the U.S. in the inflation cycle?

Inflation data through June shows tariffs starting to influence prices, with the Consumer Price Index (CPI) rising 0.3%, and the annual rate rising to 2.7% – the highest since February and in line with expectations. Core CPI, which strips out food and energy, increased 0.2% for June and now sits at 2.9% year-over-year. Shelter costs rose just 0.2% on the month but still accounted for the biggest share of CPI gains, up 3.8% from a year ago.

Most economists agree tariffs drive up prices and dampen growth, but there is less consensus on how sharply or how soon that effect will show. One likely reason for some delay: many businesses rushed to stock up before the tariffs took effect, giving them a cushion to hold off on price hikes in the near term.

Wells Fargo warns that the cushion from pre-tariff inventory is thinning fast. “We expect core goods prices to pick up further in the second half of the year as a result,” the bank’s economists wrote in a recent research report. “Inflation is going to kick into a much higher gear in coming months,” said Mark Zandi, chief economist at Moody’s. “We are on the leading edge of that now, but it will become clearly evident in the months ahead.”

On July 31, President Trump modified the tariff rates that were first announced in April, ahead of the August deadline. All countries will be subject to a 10% tariff except for goods from the 92 countries listed in an annex that are subject to higher tariff rates. Imported goods from the EU and Japan will be subject to a 15% tariff. Taiwan, another major trading partner, will be subject to a tariff of 20%.⁴

What is the likelihood of a stagflation scenario?

Economic projections are mixed. Bank of America (BofA) analysts suggest that the U.S. will likely sidestep a stagflation scenario and could even see an economic boom. “Today a confluence of factors argue that the key tail risk that may not be priced in is not just a cyclical recovery, but a boom,” said analysts. They believe the positive market developments will be driven by several factors. The first is expected near-term pro-growth initiatives due to the upcoming U.S. midterm elections. Another factor is global stimulus, with Germany’s recent stimulus being one of the largest in EU history. BofA also projects a broad increase in capital expenditures over the next two years, including non-U.S. companies expanding manufacturing capacity in the U.S.⁵

A less bullish case is seen by Swiss Re, which expects that the U.S. could see another stagflationary shock in the second half of the year, with economic growth slowing and inflation increasing due to less efficient global supply chains and potential re-escalation of global tensions in the Middle East. Tariffs are also seen driving an increase in CPI to an average of 3% in 2025. Swiss Re also sees inflation becoming “structurally stickier closer to 3%” due to U.S. companies reshoring supply chains.⁶

Overall, there may be elevated inflation in the second half of 2025 due to government policies and geopolitical factors. Higher than anticipated inflation could impact reserve levels and underwriting profitability for the insurance industry. With increased inflation comes the worry that property-casualty insurers’ claims costs could exceed reserves if reserves were established with much lower inflation assumptions. However, industry reserves are in a far stronger position now than they were in the 1970s.

What To Expect From A Softening Commercial Insurance Market

The softening of the commercial property and casualty P&C insurance market, which started in 2024, shows no sign of slowing down in the back half of 2025. It’s becoming one of the major challenges commercial brokers are navigating, with some brokers adjusting strategies or planning for potentially reduced revenue. Softening rates have the potential to negatively impact the growth and value of some firms, but it may take only slight adjustments in company goals or marketing methods to overcome soft conditions. Before firms scale back business initiatives or consider laying off staff, it’s important to get a clear picture of where each insurance line is headed and where opportunities exist. Furthermore, market conditions differ significantly by line.

Current and future state of softening

Hard market conditions are beginning to ease, and large segments of the market are now experiencing flat-to-modestly down pricing and greater capacity. Experts don’t foresee a sharp decline, but more of a moderation over time. Rate increases are still happening, but not to past levels. Instead of 15-20% increases, 5-10% are more common depending on the line. Current softening conditions drivers include a more favorable reinsurance market, an increasingly competitive landscape, and improved underwriting results.

However, the trend since 2020 has been a steady moderation in the size of premium increases, across most lines.

The market conditions also vary widely based on geography; some states will remain in a hard market cycle, while others may experience much softer market conditions and have challenges fueling growth. In addition, the change from hard market to fully soft is gradual and can take years, so expect to see shifts depending on factors like frequency or severity of claims.

True organic growth will be revealed

One of the most important questions brokers should consider is whether their growth is ‘real’ organic growth that is sustainable even in less than utopian market conditions. Many insurance brokerages have been lucky, rather than productive, due to the benefits of hard market conditions and economic expansion driving premiums to all-time highs. But top performing brokers produce results even without the tailwinds of a hard rate environment or positive economic conditions. The disparity between growth-focused firms and others is shown in the chart below. While average firms saw organic growth of 8.96% in 2024, the Best 25% of firms (based on their financial performance, specifically organic growth) grew an average of 20.26% – a stark difference.

Those high-growth firms make strategic decisions that create profitable, predictable, organic growth achieved by superior new business production and retention. They will be better prepared for fluctuations in economic conditions, regulatory changes, and shifting trends in the insurance industry.

Brokers must strategize to innovate and differentiate

Top performing firms are able drive sustainable new business by setting specific, measurable goals, then creating a strategic roadmap to achieve them. These brokers consistently take measures to implement new client acquisition strategies, strengthen customer retention, and improve their industry partnerships and acumen.

To stay ahead of client expectations in a digital-first world, brokers must think beyond commonplace insurance products and incorporate new services, such as risk management consulting, enhanced self-service technology, and niche market specialization. Focusing on gaps in client needs, gathering data on pricing, and collecting feedback on client service can provide useful insights to help organizations make improvements or offer new products. As premium rate increases moderate, so could commissions for brokerage firms, but in a softening market, clients tend to explore a wider range of options. By continually iterating solutions and evolving their value proposition, brokers can stand out from the competition, retain clients, cross-sell products, and proactively address the possibility of a soft rate environment.

Unexpected opportunities emerge

While softening markets are often seen as negative due to lower commissions and profit margins, clients tend to become more receptive to brokers’ recommendations, so it’s a prime time to better understand the client’s business and encourage them to add new services or lines as needed. Soft conditions are also optimal for attracting new clients due to more favorable conditions for buyers, particularly those who wanted to purchase more coverage but either couldn’t afford it during a hard market or were previously denied coverage.

Insurers might be more willing to provide higher policy limits to clients as well, so negotiating terms and conditions is often easier, enabling brokers to customize policies to meet the specific needs of clients. Remember that not all lines are moving towards soft conditions, making it a good time to enter a previously unexplored space, for example, cyber. The demand for cyber is increasing, which might present the opportunity for additional revenue as the cyber market continues to experience significant growth. No one can control market conditions, but businesses that create their own opportunities for sustainable, organic growth will be ready when markets become fully soft.

While there are predictions of significant growth in some sectors, obstacles could arise over the coming quarters due to new tariffs and increasing inflation. A soft market will reveal who’s been truly growing and who’s been riding rate increases as the source of growth. In the immortal words of Warren Buffett, “You don’t find out who’s been swimming naked until the tide goes out.”

The Race For Scale In Mid-market Insurance Brokerage M&A

As the competitive landscape continues to evolve, those firms with revenue between $500K to $10 million are starting to feel strategic pressure to grow, which will drive even further consolidation. MarshBerry predicts that larger insurance brokerage firms (over $10 million in revenue) and smaller insurance brokerage firms (less than $500,000 in revenue) are both likely to increase significantly in number by 2035.

With increasing consolidation and larger firms focused on growing by acquisition, the number of $10 million+ insurance brokerage firms is projected to continue to increase. Likewise, the number of smaller firms (those that are under $500,000 revenue) is also expected to continue to grow, partly driven by new entrants and spin-offs from larger firms.

Midsized firms are getting caught in between growth and consolidation

However, those firms in the middle – between $500K to $10M in revenue – will likely face the most pressure to consolidate. These firms need resources to be able to hire and develop multiple producers. They also experience challenges competing with larger firms on issues like technology, carrier partnerships, and service efficiency. Such pressures may drive the smaller firms to join larger firms to gain these resources and solutions, and to become more competitive.

Here are some strategies for mid-market firms facing pressure:

Set clear incentives to drive growth. Producers receive most of their incentives through compensation. Sales goals must be clearly defined, performance must be monitored regularly, and there must be a variety of consequences in place if expectations are not met. Effective goal setting includes:
- Minimum Goal: The baseline required for anyone to maintain producer status
- Individual Goal: Each producer’s personal target
- Stretch Goal: Aspirational targets for top performers
  
  These goals should be informed by historical performance and market conditions, tied to meaningful incentives – and then communicated clearly. Once these expectations are clear, there must be a system of accountability, possibly also including some non-compensation-related incentives.

Implement technology solutions. Investing in advantageous technology is one way to become more competitive. The right tools can help optimize efficiencies, drive sustainable growth, and create business intelligence that enhances your agency’s evolution.
Explore new business niches and become a specialist. Firms can also look for underserved markets or specialized insurance products where competition might be less intense. Being a trusted advisor, as opposed to just a vendor, may differentiate a firm from its competition. Clients may see more value when they are offered prescriptive solutions that help with risk mitigation.
Invest in producers by prioritizing training and development. If your firm conducts an annual sales kickoff, how much do you focus on training? Training and developing producers should be a core part of your culture. Start by looking at the team’s weak spots. How are their sales conversion rates or relationship-building abilities? Can they handle and overcome objections? Create training and onboarding programs specific to these core skills or any areas you identify as needing improvement.
Consider a strategic partnership. Certain sell-side scenarios have the look and feel of a strategic partnership that allows firms to maintain operational control while gaining access to resources and aligning incentives with growth, through equity. This may allow owners to maintain their autonomy while benefiting from the expertise of a larger organization and gaining greater access to resources for acquisitions, new hires, and technology initiatives.

To remain competitive in today’s market as larger firms invest more in technology, carrier partnerships, and service efficiency, midsized firms will need to find ways to maintain their recent growth. This will require leadership to be forward-thinking about building the right teams and implementing the right strategies for the future.

Sources:

In This Issue

Focused Insights: The Great Differentiator: Being A Trusted Advisor

Industry Insights

M&A Market Update

Public Broker Performance