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A Number of Factors Have Converged to Send Insurance Premiums Higher

By
Insurance Special Coverage

Perfect Storm

Inflation ebbs and flows in unpredictable ways. The insurance world is certainly finding that out — and so are customers seeing their auto-insurance bills.

“Auto insurance hasn’t kept up with inflation over the past three to four years, and it’s finally catching up to it,” said Michael Long, CEO of Axia Insurance Services in Springfield, partly explaining why the average premium nationwide rose more than $240 in the past year, according to Bankrate.

There are plenty of other parts to the equation, of course, including the ongoing supply shortages that are generating inflation on everything that goes into cars, from materials to computer chips to labor.

In fact, used-car values in 2022 were 37% higher than they were previously, Long said, meaning insurance carriers that had been paying, say, $20,000 for a totaled car were now paying $30,000. Eventually, that was going to be passed to customers.

Bill Grinnell, managing partner of Webber & Grinnell Insurance, agreed. “A few things are driving automobile prices; one is supply-chain issues and a lack of supply of replacement vehicles and parts, and the increased costs of all that.”

As a result, he went on, “your collision claim that might have cost a couple thousand dollars pre-pandemic is now $3,800. It’s significantly more, and the insurance has kind of trailed that inflation. First the cost of the replacement vehicles and parts go up, and that’s reflected in the financial statement of the insurance company, and they need to react and bring rates up. It’s not a leading edge, but a trailing edge, but there’s an inflationary factor there.”

And it’s not just auto insurance. On the home-insurance side, the cost of building materials has risen sharply over the past few years, and supply shortages and lag times still beset the construction industry. Meanwhile, contractors dealing with those issues and also a workforce crunch aren’t able to take on as many jobs as they’d like.

Bill Grinnell

Bill Grinnell

“The cost to build a home three years ago might have been $175 per square foot, and now it’s $275 per square foot. If you’re insuring a home that was worth 300,000, now it’s $400,000.”

“The combination of those two factors have driven up the cost of repairs, and that’s reflected in increased claim payments. So insurance companies need to adjust their rates to afford these claim payments.”

The other huge factor is the dramatic rise in home values over the past two years, another supply-and-demand metric. “You’re required to insure your house to an educated, calculated measurement of its true replacement value,” Grinnell said. “And the cost to build a home three years ago might have been $175 per square foot, and now it’s $275 per square foot. If you’re insuring a home that was worth 300,000, now it’s $400,000.”

Whatever the reason — and, obviously, there are many — insurance customers are experiencing more pain than usual in their monthly premiums. While there are ways to reduce the hit, the key economic factors influencing those increases will continue to linger, at least in the short term.

 

Up, Up, and Away

Plymouth Rock Assurance recently created an infographic that showed customers why home and auto rates are rising.

On the home side, it listed a worker shortage (the construction industry is down 200,000 trade workers); supply-chain shortages and delays with everything from asphalt shingles and piping to copper wire and drywall; lumber and other material costs up more than 50%; and increased operating expenses for energy, transportation, storage, and more.

On the auto side, higher costs are related to chip shortages; a technician shortage driving labor costs up about 6%; a shortage of parts in repair shops causing delays, higher demand, and higher repair prices; and a still-low vehicle inventory on many lots, inflating the sticker price of cars — and their replacement value.

Michael Long

Michael Long

“Not all insurance companies are created equally. Whether it’s the way they handle claims, the way they handle billing, the way they handle cancellations after a loss or two losses, all those things need to be discussed with an agent because not all contracts are the same.”

“It’s a challenging time for all of us,” Long said. “When we talk to clients, last year’s rates were up about 15% on the auto side, and we’re expecting another 8.4% this year.”

Some of the cost factors are unexpected — for example, glass replacement. “With glass claims, it used to be a couple hundred to replace a windshield. I’ve seen them as high as $2,400 because of all the information you get from the sensors in the windshield.”

Then there’s driver behavior. Long noted that accidents were up 7% in 2022, and insurance companies have never seen the volume of lawsuits they’re dealing with.

Grinnell agreed. “The results are worse for insurance companies. The severity of accidents is up, and that’s driving up the cost of the insurance, too.”

There are only so many ways for customers to reduce insurance costs, and some of them are common-sense.

“First, don’t have a claim. Drive carefully,” he said. “Claims really impact your premium quickly, so drive safely and don’t have motor-vehicle violations; don’t get a speeding ticket.”

Paying bills on time helps as well, he said. “There are so many hidden factors that none of us understand, even at the agency level, that go into ratemaking these days, but late payments and being consistently behind and getting cancellation notices is a sure way of having your premiums go up. So pay your bill on time and even enroll in automatic bill payment.”

While it’s important to have adequate coverage, Grinnell said people with older cars they might not be driving for much longer may opt out of collision coverage. He did just that with a 12-year-old car he owns but doesn’t drive that much, and it saves him about $450 per year.

Long said he talks to clients all the time about raising their deductibles. “If you currently have a $500 deductible, maybe look at a $1,000 deductible. If its $1,000, maybe $2,500. We’re regularly quoting $2,500 deductibles,” he noted. Meanwhile, “if a tree comes down, and it’s a $500 loss, absorb it, and pay it in full.”

Carriers also offer any number of discounts, from safe-driver and good-student benefits to discounts related to involvement in organizations ranging from the Pan Mass Challenge to the Massachusetts Golf Assoc. “There’s a Red Cross discount; if you contribute $25 to the Red Cross, you get 5% off your insurance. So you’re helping the community and saving money on insurance. Everyone wins with that deal.”

 

Weather or Not

The home-insurance market has been buffeted by a series of costly weather events, from hurricanes in Louisiana and Texas to tornadoes in the Midwest to fires in California. Insured losses from natural disasters routinely top $100 billion per year these days, and Long said $20 billion of that in 2022 was in auto claims alone.

As noted earlier, the cost of lumber and other building materials (up 33.9% in 2022) and labor (up 27%) are already causing insurance companies to play catch-up, and weather and climate events are just another challenge to deal with.

“It’s been a funny year for homeowners,” Grinnell said. “Property rates were certainly affected across the country due to some of these climate changes and weather patterns, the big windstorm losses.”

He noted one “big freeze” day last year that wound up affecting the region’s home-insurance carriers. “It was one of the biggest lost days on record. Pipes burst, and those are expensive claims. Generally, that’s not helping our region at all.”

Long advises people to be careful when switching carriers due to rising rates because the new carrier might not have made the same inflationary adjustments, and the customer will just have to face that all over again — while possibly losing benefits like accident forgiveness.

“Not all insurance companies are created equally. Whether it’s the way they handle claims, the way they handle billing, the way they handle cancellations after a loss or two losses, all those things need to be discussed with an agent because not all contracts are the same.”

On the other hand, Long said customers should absolutely stay in touch with their agent. “How often do you review insurance with them? Every year is not realistic, but every two to three years, you should be getting a call from your agent: ‘hey, let’s talk about what’s going on, and any new coverages out there.’”

After all, people still need to have enough coverage in case the worst does happen. And with home values what they are now, a total loss could be extra catastrophic if the coverage is not in line with that.

“The biggest investment people have is their dwelling. So, young people may have the time to make up for a disaster, to build equity in their house if they lose it,” Long said. For older homeowners, inadequate coverage for a loss could be a real problem.

The bottom line? Insurance costs money, and even more so this year, as customers should expect premiums to rise another 8% to 10% for both home and auto, Long said.

But when disaster strikes — even a small disaster, like a burst pipe or a sideswiped car — it beats not being covered.

Using History as Our Guide

By Contributor
Wealth Management

It Shows That Our Pain May Be Followed by Some Gains

By Jeff Liguori

 

According to Google searches, the popularity of the term ‘inflation’ hit its highest peak in at least five years during the second week of August of last year.

Jeff Liguori

Jeff Liguori

For the sake of comparison, the term ‘stock market’ is one of the more popular Google searches. On average, ‘stock market’ is three times more popular than ‘inflation.’ For further comparison, the search for ‘Lebron James’ is regularly much higher than ‘inflation,’ but still not quite as popular as ‘stock market’ on average. Yet, in August of last year, ‘inflation’ bested both terms, by a wide margin.

Higher consumer prices are causing anxiety. The Federal Reserve, with its dual mandate of full employment and low inflation, has been working to ease prices through higher interest rates, which led to weak performance in both stock and bond markets in 2022 — a rare phenomenon when both markets sell off in tandem.

When the Fed raises the federal funds rate, an interest rate that banks charge to one another for overnight lending, it has a ripple effect, putting upward pressure on all interest rates, from mortgages to treasury bills. In turn, all assets get ‘repriced’; stock prices adjust lower (usually) because higher rates often mean profit margins for those businesses shrink, which equates to a lower valuation for that company’s stock price. The repricing of assets has wide-ranging implications and is often disruptive to an economy.

Is the Fed acting appropriately? Wall Street, with no lack of varying opinions, either believes the Fed has overstepped by tightening too quickly and too late, or the Fed should be more aggressive in the next two sessions and then be done. Finding an economist or strategist that thinks Jerome Powell and his crew are precisely doing the right thing is nearly impossible.

Instead of opining on the Fed’s actions — I’m not an economist, more of an ‘investment historian’ — let’s put the discussion in the context of past cycles of rising inflation and what it might mean for investors.

From January 1966 to August 1969, the federal funds rate more than doubled from 4.5% to 10.25%, in what was then seen as aggressive action by the Fed to tame inflation. In August 1969, the Fed reversed course, cutting interest rates as the economy slowed and the country faced increasing job losses. To safeguard the economy, the Fed quickly went from raising to easing interest rates, moving the effective rate back to about 5% in March 1971, as unemployment started to tick up.

But the story doesn’t end there. Inflation was persistent even with a slowing economy because of a burgeoning energy crisis. Once again, the Fed moved to a tightening stance, this time increasing interest rates by more than 300% from the spring of 1971 to the summer of 1973. Interest rates skyrocketed, and stocks suffered badly, declining by more than 40% in the 14 months following the start of that new tightening cycle, before bottoming in October 1974.

Interestingly, interest rates remained historically elevated throughout the 1980s, but stocks managed to do quite well. From the low in October 1974, the S&P 500 had an impressive run until the tech meltdown in 2001, appreciating 460% into late 2000. The data is compelling.

Following the Fed pause in 1974, in 21 of the subsequent 28 years leading up to the tech bubble, stocks generated a positive annual return. The worst year was 1977, when the S&P was down 11.5%, and the best year was 1995, when the S&P 500 generated a positive 34% return. There were eight years in that three-decade stretch when stocks increased by more than 25%.

To put things in perspective: the federal funds rate increased from 2.25% to a peak of 14.3% from February 1971 to July 1974, a total increase of about 230%, a slow and steady move higher in that 40-month period. Beginning in March of last year, the Fed raised rates from a historic low of 0.08% to 4.75%. That may seem milder as the overall level of interest rates is still historically low, but consider the Fed took this action in 11 months, increasing rates by more than 5,000%.

Overall, 2022 was unprecedented, both in the dramatic measures by the Fed and the performance of financial markets. Bond and stock markets haven’t generated a negative return in the same calendar year in almost 60 years. And there has only been one other year since 1960 when bonds had a decline in value of more than 10%, in 2009; however, the stock market appreciated almost 26% that year as the country emerged from the 2008 Great Recession.

So, what if the Fed — irrespective of Wall Street opinions — is doing exactly what needs to be done? And what if the economy avoids a recession? And what if stock and bond prices have already adjusted for a recession that doesn’t materialize (or is mild)? If history is our guide, financial markets can produce healthy returns even in inflationary periods, after some initial pain.

The answer may be as simple as to ignore consensus. Be a contrarian. The pain to our portfolios over the past 18 months may be the first step to higher returns in the near future.

 

Jeff Liguori is the co-founder and chief Investment officer of Napatree Capital, an investment boutique with offices in Longmeadow as well as Providence and Westerly, R.I.; (401) 437-4730.

Rising Interest Rates Dampen Economic Activity, but That’s the Point

By
Banking and Financial Services

Uncertain Times

 

Another month, another rate increase from the Fed. The moves aren’t unexpected, and are needed to slow inflation, but they are concerning, especially to borrowers.

“We haven’t seen inflation like this since the ’80s. To anyone who remembers the late ’70s and early ’80s, when inflation was running really high, the dangers that represents are self-evident,” said Kevin Day, president and CEO of Florence Bank.

“The Fed responds immediately to a heated economy, and when the economy is overheated, that’s when they raise rates” in an effort to slow inflation, he told BusinessWest. “This time is a little different; inflation already showed up, and now they’re having to calm it down. So it’s a different environment than we’ve seen in the last 40 years, and that has created a great deal of uncertainty. And no one likes uncertainty.

“But they’ve been pretty consistent in that they’re going to raise rates to bring inflation under control, and they’re going to continue to raise them more until they get it under control,” Day added. “How far do they have to go? No one knows that, of course, and that’s what breeds the uncertainty.”

The Federal Reserve’s mission is to keep the U.S. economy humming, but not too hot or too cold. So when the economy booms and distortions like inflation and asset bubbles get out of hand, threatening economic stability, the Fed can step in and raise interest rates, cooling down the economy and keeping growth on track.

Kevin Day

Kevin Day

“It’s a different environment than we’ve seen in the last 40 years, and that has created a great deal of uncertainty. And no one likes uncertainty.”

On Sept. 21, the federal funds rate was raised by 75 basis points, to a range of 3% to 3.25%. The move followed 75-basis-point hikes in June and July, and two smaller rate hikes in March and May. The Federal Open Market Committee will meet twice more in 2022 to decide if further hikes are necessary in the fight against high inflation.

Still, “not everyone thinks higher mortgage rates are a terrible thing,” Forbes notes. “Some real-estate professionals see higher rates as one way to cool an overheated housing market. Others think it’s time to get back to normalcy after two years of artificially low borrowing costs.”

In addition, rising rates are not a bad thing for banks in general. When interest interest rates are higher, banks make more money due to the difference between the interest banks pay to customers and the interest the bank can earn by investing.

Still, banks also worry about recessionary environment when rates spike, an environment that opens the door to financial struggles, bankruptcies for individuals, and business failures, Day said. “Rates rising a bit is usually good for banks, but when it starts going too fast, it creates other problems no one likes to see.”

 

Historical Perspective

While inflation is at 40-year highs, interest rates are nowhere near the 6.5% seen in 2000, not to mention the record high of nearly 20% in 1980. Instead, rates have simply returned to pre-pandemic levels, which are historically on the low side.

“In terms of absolute levels, and in view of history, current interest rates are still at attractive levels,” said Mike Kraft, head of CRE Treasury at JPMorgan Chase. “Generally, I would say this is a great time to do business — before additional rate movements kick in.”

However, while historical trends favor current borrowers, people tend to think in the short term, and any rate increase dampens enthusiasm to borrow — which, after all, is the Fed’s intention: to slow the economy.

“Borrower behavior is always impacted by rising rates,” Day said. “People just tend to borrow less money, unless you’re in the credit-card business, which we’re not. We deal with mortgages and commercial loans, and borrowers are more hesitant as rates rise; they don’t want to commit until they have to. As rates rise, what happens is businesses take less risks — they don’t necessarily build or open that next location. Borrowing definitely declines as rates rise faster.

“In a perfect world, if it’s done at a moderate pace, nobody gets hurt too badly,” he went on. “It might slow a little bit, but businesses still make investments in property and equipment. But if it goes rapidly, it’s kind of an unknown. ‘Will this impact my business? Should I open that location? Will there be no business in six months?’ It makes businesses hesitant.”

On the other hand, people more focused on saving money than borrowing it may find the rate hikes a breath of fresh air, even if savings interest still lags behind interest on loans.

“How quickly you’ll see higher APYs on deposits depends on where you bank,” Forbes notes. “Online banks, smaller banks, and credit unions typically offer more attractive yields than big banks and have generally been increasing rates faster because they have to compete more for deposits.”

Day agreed that competition puts pressure on banks to raise deposit interest rates, while the gains are most prevalent in the CD market. “You can get 4%, where years ago, it was hard to get 25 basis points.

“So rising rates are generally beneficial to consumers who save money,” he added. “Borrowers usually don’t like them, but retirees on a fixed income might have assets in investments, and rising rates should help them have alternative ways to earn more money. So there’s two sides to this.”

 

Stay Tuned

The bottom line is that inflation is the highest it’s been since the early ’80s, and that makes everyone skittish, even if one of the remedies — rising interest rates — isn’t welcomed by everyone.

“We’re in uncharted territory,” said Ginger Chambless, head of Research for Commercial Banking at JPMorgan Chase. “By raising rates through this year, the Fed is trying to get a handle on inflation and slowly pull some of the excess liquidity out of the economy. I think it makes sense for the Fed to take a gradual approach. This way, they can see how the economy holds up along the way, as opposed to a more drastic increase, which might cause undue panic in the markets.”

Panic may be a strong word, but the word Day used — uncertainty — is definitely apt for banks, borrowers, and the financial industry as a whole. And with more decisions yet to be made by the Fed, the volatility may not be over.

 

Joseph Bednar can be reached at [email protected]

Pandemic’s Over, but Challenges Remain

By
Opinion

Editorial

 

President Joe Biden famously, and matter-of-factly, announced recently that the pandemic is “over.”

Whether that’s true or not remains to be seen, but what isn’t in question is the fact that, while the pandemic may indeed be a matter for the past tense, businesses large and small continue to face a mountain of challenges, many of them stemming directly or indirectly from the pandemic.

This much was made clear in a recently released MassINC survey that revealed, among other things, that just over half the businesses polled, 53%, are reporting revenues lower than before the pandemic.

Meanwhile, inflation is at a 40-year high, supply-chain issues persist, a labor shortage continues, the Great Resignation is far from over, and now there is apparently a new workforce issue to contend with — so-called ‘quiet quitting,’ whereby employees don’t officially leave their jobs; they just do the bare minimum.

We’re not sure if quiet quitting is a byproduct of the pandemic or not — it’s a relatively new phenomenon, and there is not much data on it — but just about everything else is, from inflation to the supply-chain issues to the persistent problems companies are having with staffing up.

So while it’s good to hear that the pandemic is over — at least in a technical sense; we’re now told that COVID is in the same category as the flu — the ‘normal’ that everyone in the Western Mass. business community was seeking ever since we first heard of COVID seems like it is still a long way off.

Especially with growing talk about a recession, when it will come, how severe it will be — and whether or not we are already in one, which many economists already believe we are, as well as headlines about soaring energy costs and escalation of fighting in Ukraine.

Maybe the biggest issue, though, is the Federal Reserve’s ongoing fight against inflation. The Fed recently raised interest rates again, this time by three-quarters of a point for the third straight time, an aggressive tactic that might — that’s might — bring inflation back down to its 2% goal, but at a potentially high cost when it comes to the economy and the plight of businesses large and small.

Indeed, the tactics used to fight inflation may well tip the economy into a recession and, in the meantime, make it harder for businesses to attain the capital they need to expand, prompting more job cuts; many businesses have already gone from hiring to laying people off. Fed policy makers are projecting that the jobless rate will reach 4.4% by the end of 2023, up from its current level of 3.7%.

Overall, the cure may be worse than the disease, as the nation witnessed 40 years ago, when, to tame inflation, the Fed pushed the country into a protracted recession.

President Biden also said recently that he believes that a “soft landing” is possible for the economy. Perhaps, but many economists are predicting a much harder fall.

That’s not what area business owners want to hear after two and a half long years of battling the pandemic and its many side effects.

Technically speaking, the pandemic is over, but the challenges remain. We said back in March 2020 that the local business community was resilient and up to the challenge. We still believe that, but this resilience is certainly being tested, and the quest for normal — whatever that is — goes on.

How Inflated Material Costs Affect Insurance Premiums

By Contributor
Insurance

On the Rise

By Lisa Johnson

 

You have probably noticed higher prices in many areas of your life. From gas to groceries, prices are going up, with the U.S reaching inflation levels never seen before — and the insurance industry is not immune to this trend. Across the industry in most markets and with most insurance companies, whether you’ve had a claim or not, home-insurance premiums are rising due to a variety of factors.

Many of these factors are out of your control, as well as your agent’s and insurance company’s. Many current conditions, including increased costs of material and labor, as well as an ongoing shortage of workers, mean you may see a rise in your premiums at renewal time.

Home-insurance rates are determined by the likelihood of a homeowner filing a claim and the potential risks involved. Rates are driven by numerous standard factors, including amount of coverage needed, age of the home, location, liability issues, and previous claims. Other influences caused by national trends also contribute to rates.

Why are home-insurance rates going up? The biggest cause is the rise in inflation. When prices rise, the cost of living and owning a home increases, which in turn influences home insurance rates. These rate increases are happening in insurance companies across the country.

Home-insurance premiums can be affected by influences outside of your control. Various nationwide factors are impacting the cost to rebuild homes, leading to the need for more coverage in case of a claim. Some of the trends that are driving up costs include higher material costs and supply-chain issues. For instance, materials to rebuild homes are up 26%. Labor shortages are resulting in longer construction and claims-handling times, which also impact the cost of claims.

 

Higher Material Costs

From record high prices to shortages of materials, the home-building industry has seen lengthy delays, increased prices, and a large number of postponed projects. These higher prices for construction projects, renovations, and repairs lead to higher costs for homeowners.

With the price of building materials — such as drywall, shingles, lumber, and copper wiring — up an average of 26%, homes have become more expensive to fix and replace. According to a survey by the National Assoc. of Home Builders, this is the largest single-year increase in the survey’s history. Ninety-three percent of contractors are impacted by the increased price of materials, which leads to higher replacement costs when insurance claims are filed.

 

Increased Shipping Costs and Delays

The pandemic has impacted almost every part of the global supply chain, causing shipping delays and higher prices. When shipping ports get overwhelmed and backed up, it impacts the time it takes to get materials to homeowners and the cost of delivering the materials.

From appliances to plumbing fixtures, it’s taken weeks and months longer to get building supplies, which previously had taken days to procure. In fact, 94% of Fortune 1000 companies have reported supply-chain disruptions from COVID-19.

Globally, RBC Capital Markets reported that 77% of ports are experiencing abnormally long times to turn around traffic. In fact, Freightos.com marketplace data shows that, in September 2021, China-to-U.S. ocean shipments took an average of 73 days to arrive at their final destination, 83% longer than in September 2019.

 

Higher Labor Costs

Builders often hire subcontractors who handle electrical, drywall, plumbing, and other areas of construction. With the current labor shortages, higher costs are needed to secure skilled laborers or obtain the needed materials. This, in turn, has forced home builders to factor in higher costs for construction and remodeling work.

Eighty-nine percent of contractors are having a hard time finding craft workers, and 88% of firms are experiencing project delays. Additionally, the U.S. is seeing a drop in the number of Americans becoming tradespeople. The National Electrical Contractors Association reports that 7,000 electricians join the field annually, but 10,000 retire. This shortfall results in higher prices and longer wait times for home projects.

 

Auto Insurance Affected, Too

Home insurance isn’t the only coverage impacted by current trends. Auto insurance is also experiencing increases due to national trends. Used-car prices are up 40%, the cost of labor for repairs is up, car parts are costlier and harder to obtain due to supply-chain issues, and rental car costs are up 30%. These factors and others are contributing to a rise in auto-insurance rates.

It might be time to review your home and auto policies with an agent to make sure your coverages are appropriate in the current inflationary market.

 

Lisa Johnson is chief operating officer for Amherst-based Encharter Insurance; (413) 658-3410.

 

Sources: NAHB, AGC, Accenture, U.S. Bureau of Labor Statistics, AutoRentalNews, CCC Intelligent Solutions, CNBC. All products are underwritten by The Hanover Insurance Company or one of its insurance company subsidiaries or affiliates. This material is provided for informational purposes only and does not provide any coverage.

 

Business Confidence Falls Again in June

By
Biz Tips & Industry News Business Management Daily News News

Confidence among Massachusetts employers edged close to pessimistic territory in June as businesses struggled with surging inflation and concerns about a possible recession.

The Associated Industries of Massachusetts Business Confidence Index (BCI) fell 3.9 points to 50.8. The Index now rests 12.6 points lower than a year ago and marginally higher than the 50 mark that separates an optimistic from a pessimistic view.

The decline, which left the Index at its lowest point since December 2020, reflects particular concern about the course of both the state and national economies. The BCI’s US Index plummeted 9.1 points for the month and more than 20.3 points for the year.

The Central Massachusetts Business Confidence Index, conducted with the Worcester Regional Chamber of Commerce, fell from 57.5 to 49.0. The North Shore Confidence Index, conducted with the North Shore Chamber of Commerce, dropped from 61.8 in May to 52.6 last month.

The confidence numbers came at a time when 76% of CEOs globally tell The Conference Board that they expect a recession by the end of 2023 or believe it’s already here. The economy appears to be growing, but employers face growing struggles with soaring fuel prices, supply chain disruptions and financial market volatility.

“Central banks around the world are raising interest rates with new urgency, hoping to cool inflation by slowing growth of aggregate demand and achieving a closer balance with supply,” said Sara L. Johnson, Chair of the AIM Board of Economic Advisors.

“Capital markets remain open, but financing costs are rising for businesses, consumers, home buyers, and governments. The year ahead will bring a more difficult environment for builders and capital good producers.”

The constituent indicators that make up the Index were  uniformly lower in June.

The Massachusetts Index assessing business conditions within the Commonwealth shed 6.6 points to 47.2, down 16.4 points since June 2021. The US Index measuring conditions throughout the country fell to 38.6.

The Current Index, which assesses overall business conditions at the time of the survey, declined 3.3 points to 53.4. The Future Index, measuring projections for the economy six months from now, lost 4.6 points to 48.1.

The confidence employers have in their own companies declined 2.6 points to 56.0, ending the month 8.7 points lower than in June 2021.

The Manufacturing Index fell 5.2 points to 49.3, 11.6 points less than a year ago.

Small companies (52.6) were more optimistic than large companies (50.2) or Medium-sized companies (49.8).

Elmore Alexander, Dean Emeritus of the Ricciardi College of Business, Bridgewater State University, and a BEA member, said the Russian invasion of Ukraine and COVID-19 lockdowns in China have added to the supply chain woes experienced by Massachusetts employers.

“Elevated demand continues to collide with supply restraints and most economists believe inflation will remain above the Federal Reserve’s 2% target through the end of 2023,” Alexander said.

AIM President and CEO John R. Regan, also a BEA member, noted that recent polls find that among all of the vexing issues facing the commonwealth, Massachusetts residents remain most concerned about the economy and jobs, inflation, housing costs and taxes.

“The citizens of Massachusetts clearly understand that economic growth and jobs form the basis of their ability to establish a stable life and raise a family. The emphasis on jobs is especially notable at a time of an acute labor shortage that has allowed workers participating in the ‘Great Resignation’ to pretty much have their pick of new positions,” Regan said.

Survey: Gas Prices, Inflation Impacting Summer Travel Plans More Than COVID 

By
Daily News

WASHINGTON — More than two years into the pandemic, Americans report that gas prices and inflation will impact their summer travel decisions more than concerns about COVID-19, according to a new survey conducted by Morning Consult and commissioned by the American Hotel & Lodging Association. 

Memorial Day weekend marks the start of summer travel season, a traditionally busy time for the hotel industry. And this year, nearly seven in 10 Americans (69%) report being likely to travel this summer, with 60% saying they are likely to take more vacations this year compared to 2020-21. 

New concerns about gas prices and inflation, however, are impacting Americans’ travel plans in a variety of ways. Majorities say they are likely to take fewer leisure trips (57%) and shorter trips (54%) due to current gas prices, while 44% are likely to postpone trips, and 33% are likely to cancel with no plans to reschedule. 82% say gas prices will have at least some impact on their travel destination(s). 

The survey of 2,210 adults was conducted May 18-22, 2022. Other key findings include: 

  • 68% of Americans agree they have a greater appreciation for travel because of missed experiences during the COVID-19 pandemic;
  • 57% are planning a family vacation this summer, a majority of which plan to stay in a hotel;
  • 46% are likely to travel overnight for a family event such as a wedding, birthday, anniversary, or family reunion;
  • 25% are likely to travel for Memorial Day; 32% for 4th of July; and 27% for Labor Day;
  • 60% say they are likely to take more vacations this year compared to 2020-21;
  • 60% are likely to attend more indoor gatherings;
  • 57% are likely to take longer vacations;
  • 56% are likely to take trips to farther-away destinations; and 
  • 90% say gas prices are a consideration in deciding whether to travel in the next three months (50% major consideration, 23% moderate consideration, 17% slight consideration, 10% not a consideration)

“The pandemic has instilled in most people a greater appreciation for travel, and that’s reflected in the plans Americans are making to get out and about this summer,” said Chip Rogers, president and CEO of AHLA. “But just as COVID’s negative impact on travel is starting to wane, a new set of challenges is emerging in the form of historic inflation and record high gas prices. We will be keeping a close eye on these issues and urging Congress and the administration to do the same in order to help ensure they don’t negatively impact hotels’ continued pandemic recovery.”

Mixed Signals, Numbers Make it Difficult to Project on the Economy

By
Features Special Coverage

A Complicated Picture

John Regan says that, in many respects, it is difficult to reconcile the numbers from the latest Business Confidence Index (BCI) released by Associated Industries of Mass. (AIM) with recent headlines and the many strong headwinds facing business owners and managers today.

Indeed, the monthly confidence index continued an upward trend since the start of the year, rising to 58.1, a gain of 0.9 points, putting the index “comfortably within optimistic territory,” according to AIM, which Regan serves as president.

That optimism, though, comes as inflation remains at nearly historic levels, gas prices continue their upward climb, a stubborn workforce crisis continues, supply-chain issues persist, and the stock market is down double digits (almost 20%, in fact) from the start of the year. That’s why Regan acknowledges that the BCI’s trajectory seems illogical, if not contradictory to what’s happening.

“It’s hard to reconcile, but people feel confident,” he said. “And the Business Confidence Index is important because if you’re confident, you’re more willing to make investments in equipment, people, facilities, and new products.”

And a closer look at the landscape might reveal that there are, in fact, reasons for such optimism, he said, starting with a simple comparison to where things were two years ago — and even four months ago — with regard to the pandemic and its many side effects.

John Regan

John Regan

“Massachusetts is on track to end this fiscal year with more than $6 billion in the rainy day fund — it’s just incredible revenue performance.”

And then, there’s those soaring state revenues. The Department of Revenue took in more than $2 billion above what was expected in April, giving Gov. Charlie Baker cause to press his case for the Legislature to take up his proposals to provide roughly $700 million in tax relief to residents.

“Massachusetts is on track to end this fiscal year with more than $6 billion in the rainy day fund — it’s just incredible revenue performance,” he said. “If you match business confidence with the state’s own revenue performance, clearly positive things are happening.”

Overall, there are several factors, competing numbers, and varying opinions relative to just what is causing this record inflation that make it difficult to speculate about what will happen short- and long-term and whether the country is heading for a recession, as many are now projecting. GDP declined by 1.4% in the first quarter, and many economists are projecting that this trend will continue in Q2. And the matter is complicated further by the Fed’s ongoing efforts to slow the pace of inflation by raising interest rates — an aggressive strategy that is fueling speculation about a recession.

As Bob Nakosteen, a semi-retired professor of Economics at the Isenberg School of Management at UMass Amherst surveys the scene, he said it is largely without precedent, thus making analysis, let alone predictions, difficult.

“We live in complicated times,” he said, with a large dose of understatement in his voice. “It’s a complicated picture, more complicated than I’ve ever seen it.”

Brian Canina, executive vice president, CFO and treasurer at Holyoke-based PeoplesBank, agreed.

“This is a very unusual period of time,” he told BusinessWest. “Because there are so many different things going on, between supply chain issues driving costs up, the cost of gas being driven up by government regulation … it’s really hard to pinpoint whether it’s true economic growth that’s driving inflation or if it’s purely government-driven. So it’s hard to say exactly what’s going on.”

And even harder to project what will happen. Nakosteen does not anticipate continued decline in GDP for the second quarter, which, if it did happen, would be the technical definition of recession. But he’s not projecting strong growth, either.

Brian Canina

Brian Canina

“This is a very unusual period of time. Because there are so many different things going on, between supply chain issues driving costs up, the cost of gas being driven up by government regulation … it’s really hard to pinpoint whether it’s true economic growth that’s driving inflation or if it’s purely government-driven. So it’s hard to say exactly what’s going on.”

“My prediction is we’ll see growth in the second quarter,” he said. “Not robust growth, maybe 1% or 1.5%, but I don’t think you’ll see GDP decline again.”

Meanwhile, Regan said economists with AIM are projecting that recession is “more likely than not, but it won’t be a terribly long recession.”

For this issue, BusinessWest talked with these experts and asked them to slice through the complex confluence of issues and try to anticipate what will happen with the economy in the coming months and quarters.

 

On-the-money Analysis

It was the late U.S. Sen. John McCain who, in 2015, described Russia as “a gas station masquerading as a country.” Paying homage to that quote, Nakosteen, echoing others, said Russia is a “a gas station with an army.”

That classification, and the acknowledgment that Russia, and Ukraine, both export large amounts of wheat and fertilizer, speaks volumes about just one of the many forces — most of them unpredictable in nature — that are impacting the national and global economic scene. And they’re also making it difficult to determine what will happen in Q2, Q3, and well beyond, said Nakosteen, who, like Regan, said that despite those aforementioned headwinds, there are many positive signs when it comes to the economy.

Bob Nakosteen

“The job market is strong, retail sales are good … so the economy is actually pretty strong, and the Fed thinks it’s too strong.”

“The GDP decline in both the state and the nation was almost more a technical issue, because all the numbers that went into it, except those regarding inventory, were strong,” he explained. “The job market is strong, retail sales are good … so the economy is actually pretty strong, and the Fed thinks it’s too strong.”

Which prompted two interest-rate hikes this year, including a half-point increase late last month, designed to slow the economy. But with those rate hikes comes talk of inflation, said Nakosteen, adding that, historically, one has led to the other.

These factors add up to a lot of watching and analyzing for people like Canina, who said there is a lot to digest, including current loan activity, or the lack thereof, as well as inflation and the dreaded inverted yield curve — a successful predictor of many recent recessions — and the impact of rising interest rates on consumer spending as the cost of borrowing increases.

Starting with a look at loan activity, he said it has slowed markedly in recent months, with most all refinancing of home mortgages complete and commercial loans in the post-PPP era being relatively stagnant.

“For what should be a very robust economic environment, we’re not seeing the equivalent loan opportunities on either the commercial or residential side,” he said, adding that the rising interest rates, coupled with low inventory and soaring prices, are certainly impacting the latter. “We’re not seeing a lot of loan demand; we’re doing what we can to find it, but it’s challenging for us right now.”

And this lack of loan activity will certainly have an impact on interest paid on deposits, he said, noting that while one might assume that these rates will rise naturally as the Fed increases interest rates, they won’t if loan activity remains stagnant.

“We’re coming off a time when banks have a ton of cash because of all the government stimulus that’s been flooded into the market,” he explained. “So they have a ton of cash on their balance sheet and not a lot of loan demand, so it’s going to be very difficult for them to pay higher rates on deposits unless they can turn that cash into loans.”

And the loan market is just one of the many things to watch moving forward, he went on, adding that the sluggishness in that area is a symptom (one of many) that the inflation being witnessed is a product of government policy and other factors — supply chain issues, workforce shortages and resulting higher wages among them — rather than the economy being hot and in need of being cooled down.

“I don’t think gas prices or the cost of groceries are really being impacted by consumer spending,” he said. “I think those things have been impacted by government regulation, supply chain, and cost of wages — grocery stores paying $17 an hour for kids to bag groceries because they can’t hire people at lower wages because there’s no one to hire.”

“It’s all been reactionary to the pandemic — everything right now seems to be incredibly artificial,” he went on, adding that, for this reason, the Fed’s interest-rate hikes might provide a real, unfiltered look at what’s happening with the economy. “We have artificially driven rates on the short term, and the Fed also manipulating rates on the long end with their bond purchases. If they can start shrinking their balance sheet, and raising interest rates on the low end can normalize the yield curve, and then get out of the markets, then we can see what’s really going on.”

Still another thing to watch is how quickly and profoundly interest rates are increased, he said, adding that, in the past, when rates rise quickly and in large doses, the Fed has had to back off and reverse course in an effort to pick up a slowing economy.

Nakosteen agreed, and noted that there are many factors that go into inflation, some of which are likely to be impacted by rising interest rates — such as the spending spawned by government-awarded money in the wake of the pandemic — and some not.

“It’s a complicated picture,” he said. “And inflation is more complicated than I’ve ever seen it.”

Looking back to see if there was a time to compare all this to, Nakosteen said there were many similar attempts to slow the economy, but perhaps none at a time when there were so many issues clouding the picture.

“It’s a bizarre mixture of factors,” he said. “There’s COVID, the war in Ukraine, the aftermath of all the stimulus … it’s a strange mix.”

And despite this mix of factors, or headwinds, business owners are generally upbeat, as indicated in the upward movement of the BCI, which Regan explained this way:

“When things are going badly, the BCI usually predicts that. Despite all the negative stock market activity and the presence of significant inflation pressures, along with continuing supply chain issues and the challenge of securing a workforce, the index is in significantly positive territory.

“When you look at the BCI and some of the other things that are happening, it’s hard to reconcile, other than to say that the people who are responding to the survey feel very confident about how they are doing and how they perceive conditions for their own operation,” he went on, adding that the next reporting of the BCI will be watched with great interest.

 

The Bottom Line

Looking again at the complicated picture that is the national economy, Nakosteen said that, historically, efforts by the Fed to slow inflation by raising interest rates usually take six months or more to reveal their true efficacy.

But in this case, such initiatives have been designed to speed that process, he said, adding that he’s not at all sure whether they actually succeed in doing that — or whether they will succeed at all, given the many question marks concerning the nature of this historic inflation.

Overall, the always complicated task of projecting what will happen with the economy has become that much more difficult. In other words, stay tuned.

 

George O’Brien can be reached at [email protected]

For Landscapers, Growth Opportunities Mix with Persistent Challenges

By Contributor
Dave Graziano
Home Improvement Landscape Design Special Coverage

Lay of the Land

Dave Graziano

Dave Graziano, project manager of the Landscape Division at Graziano Gardens.

For area landscapers, the pandemic created a boom in business as consumers working at home and unable to go on vacations decided to improve their surroundings and invested accordingly. There is still some of that going on, but noticeably less, with consumers enjoying more spending options, while also experiencing considerable anxiety over sky-high inflation. While there is still plenty of work, landscapers confront a host of challenges, from workforce issues to shortages of materials to soaring gas prices.

By Mark Morris

 

The phones are ringing at landscaping companies this spring — but not at the same frenzied pace of the last two years. And that’s just one of many trends to watch as the calendar moves to mid-spring

Overall, consumers People are more cautious about spending their money this year, said Greg Omasta, president of Omasta Landscaping in Hadley, and, at the same time, they certainly have more spending options than they did in 2020 and even 2021.

“Those who have the money and want to improve their yard are still going to,” Omasta said. “For everyone who was on the fence about it … not so much.”

Steve Corrigan, president of Mountain View Landscapes and Lawncare in Chicopee, concurred with that assessment. He said that while his company has backlog of business through June, he’s not as confident about the rest of the year.

“We’ve had internal discussions that we don’t have as many leads compared to this time last year,” he told BusinessWest. “People are still requesting work but we’re wondering if we will be as busy as last year.”

Two years ago, the pandemic forced people to spend more time at home. Many looked at their outside surroundings and decided they needed to invest in their yards, in many cases using money that would normally go toward a vacation away from home. This created a huge boom for landscapers who could barely keep up with all the demand for their services.

“Now that people are able to travel again, it seems like the COVID spending is slowing down,” Omasta explained, adding that on top of leisure travel increasing and people returning to the workplace, landscapers are experiencing an unseasonably cold spring that brings with it other challenges.

“Every year is different,” said Dave Graziano, project manager of the landscape division of Graziano Gardens in East Longmeadow. “If you talk with any independent businessperson there is some worry this year about what’s coming.”

That worry usually involves how to handle increased business costs, finding workers, and managing supply chain issues with various products. And landscapers are certainly having to cope with all those issues and more.

“Those who have the money and want to improve their yard are still going to. For everyone who was on the fence about it … not so much.”

Indeed, all the landscapers we spoke with have commercial clients as well as residential customers. Rachel Loeffler, landscape architect and principal with Berkshire Design Group in Northampton, said there is often competition, if one can call it that, between commercial and residential when supplies are short.

“Sourcing for plants can be challenging in normal times,” Loeffler said. “Now contractors check with five or six nurseries when they would normally go to one.” This scramble for plants often means finding substitutes.

As a landscape architect, Loeffler often recommends using products like cedar wood that will remain durable for years to come. When cedar became, in her words “extremely expensive” it changed the conversation with clients.

Steve Corrigan leads his crew as they install pavers at Loomis Village in South Hadley

Steve Corrigan leads his crew as they install pavers at Loomis Village in South Hadley, one of many current projects for his company, Mountain View Landscapes and Lawncare.

“They had to go back and figure out how to build something that was durable and sustainable, but would also fit their budget,” Loeffler said.

Even world events affect landscaping materials. Omasta pointed out that many of the minerals found in fertilizers come from Russia. “So, some of our supply chain issues are based on what’s going on in the Ukraine.”

For this issue and its focus on landscaping and home improvement, BusinessWest talked with several business owners and managers in this sector. These discussions revealed the full breadth of challenges facing these companies — as well as the ample opportunities for continued growth.

 

Root Causes

Omasta told BusinessWest that, while it’s getting a little easier to find products — with the accent on little — items are coming in at premium prices that are generally 30% to 50% higher than last year.

But finding some products and materials remains a challenge, and the shortages result from a variety of reasons.

As just one example, Both Graziano and Omasta noted the difficulty in finding large evergreens and other large-caliber trees. And Loeffler said the recession of 2008 is the reason why it’s difficult to find such trees now.

“The trees that are available now were cultivated some 10 to 15 years prior,” Loeffler said. “In 2008, many nurseries cut back on their normal planting because of a big drop in demand.”

Overall, tree shortages and rising prices of everything from lawn-care products to bricks are just some of the challenges facing landscapers.

Indeed, on the commercial side of the ledger at Mountain View, Corrigan said his crews are working on several projects in Eastern Mass for parks, playgrounds, and athletic fields. While travelling up to an hour and a half from his home base in Chicopee is a common practice, fuel prices are forcing Corrigan to refigure what vehicles he sends to specific jobs.

“Our crew trucks use a lot of fuel so we leave them at the jobsite and go back and forth with different vehicles,” said Corrigan, adding that he’s looking to conserve whenever and wherever he can, because the numbers are so staggering.

“Last year we spent about $280,000 on fuel,” he said.“With prices increasing, if we use the same amount of fuel as 2021, it will add more than $100,000 to our costs unless we do something different.”

With more than 40 vehicles in the company’s fleet, costs can add up quickly. A newer vehicle might offer better gas mileage — if you can get one, that is.

“We placed an order for three new vehicles back in December,” said Corrigan. “And we won’t see them until July or August.”

Meanwhile, finding enough labor to get the job done remains a challenge.

Corrigan said his company has 95 people on the payroll and he could easily add another 10 — if he could find them. “Just before COVID, we hired a full-time recruiter, because even then we were having trouble finding help,” he noted, adding that the landscaping sector tends to attract young, entry-level people.

Many candidates get disqualified for failing their drug screen or for bad driving records, he went on, adding that he remains optimistic about the labor front. “We’ll get through it, one person at a time.”

Staffing has remained steady for Omasta Landscaping, thanks to a core group that has been with the company for several years. While landscape construction jobs remain hard to fill, Omasta said he had the opposite experience when hiring for clerical and office jobs.

“We took out ads for office people and the response has been tremendous,” Omasta said. “It seems there are people in the job search right now, whether it’s a career change or looking for a different job.”

While coping with these day-to-day issues and challengers, landscapers are also responding to longer-term trends, many of them involving the environment, cost-effectiveness, or both at the same time.

Rachel Loeffler says there is often competition between commercial and residential customers when supplies of certain products are short.

Loeffler told BuisnessWest she is doing more “lifecycle-costing” for projects. With this method, she will evaluate the installation of two similar materials — for example granite curbing vs. concrete curbing.

“We look at initial upfront cost, how long before each needs to be replaced, and then the cost over 100 years … and it’s crazy,” said Loeffler. “While granite is more expensive at the onset, over a 100-year period it’s significantly cheaper.”

She explained that concrete curbing has a useful life of about 15-20 years, so any time the asphalt paving is replaced, a new concrete curb will need to be built. With granite, a bucket loader can pick up the curbing and reset it each time the area is paved.

Loeffler admits most people don’t get excited about curbing, and she understands that project managers may opt to save money in their budget by using concrete, though granite proves to be a less expensive choice over the long term.

In a similar vein, Corrigan said changes are happening with the safety surfaces on new playground construction. For many years, landscapers have covered the areas around playground equipment with a thick installation of wood chips. The specs now call for poured in place rubber surfacing.

“It can cost four to five times more than wood chips, but project owners want it because the rubber works better from a safety perspective and they don’t have to go back every year to dress off the wood chips,”Corrigan said. The two-part process involves a base mat with a colored surface on top. In order to meet safety requirements, the rubber surface goes through a series of tests that mimic children falling on it.

 

Getting the Real Dirt

Looking at the proverbial big picture, Omasta said he understands that people don’t think about landscaping on cold, raw spring days, and there have been quite a few of them lately. “Once we start seeing sunny 70-degree days, the phone will ring off the hook,” he said, expressing optimism that his company, and this sector, will continue to flourish in these challenging times.

Graziano concurred, noting that the cold and windy weather has kept early customers from browsing at the garden center and from booking landscaping services.

“We’ve had a little slower April, but most likely May and June will be crazy — it’s the nature of the business,” he said, adding that nature, meaning Mother Nature, is just one of many issues to be confronted during what will likely be a different kind of year.

The Principles of Supply and Demand Are Driving Prices Skyward

By Contributor
Wealth Management

Inflation: It’s Economics, Not Politics 

By Jeff Liquori

 

In July 2021, the Bureau of Labor Statistics released an unusual piece of data: the average price of used cars and trucks had increased a whopping 42% over the previous year. Given the constraints in the supply chain, this extraordinary jump was dismissed as an aberration; in fact, the total increase in consumer prices that month was one of the sharpest in recent history. Interestingly, the consumer price index (CPI) category that had the second-largest uptick? Energy.

Energy is sensitive to inflation. Prices may experience higher volatility in the short term, but ultimately supply and demand is what drives the price. It’s surprising that investors and analysts did not pay more attention to these fundamental metrics at that time.   

During the 2008-09 Great Financial Crisis, congress, passed two acts to rescue the financial system from near ruin, authorizing a total of $1.5 trillion in stimulus funds. Financial markets recovered and the economy expanded, albeit at a moderate pace. The first piece of legislation was at the end of Bush’s second term and the second passed two months into Obama’s first term.  

Jeff Liquori

“The fundamentals of supply and demand will support the persistence of inflationary pressure, and the occupant of the White House, past or present, has little to do with that.”

Two years ago, the planet faced a crisis not seen since the 1918 influenza pandemic: COVID-19. To combat it, countries locked down, effectively grinding commerce to a halt. In response, Congress enacted nearly $2.5 trillion of stimulus assistance, and Federal Reserve banks used their monetary tools to make capital markets even more liquid. In the third week of March 2020, extreme investor panic caused stock prices to bottom out.  But then Americans started to spend again, and in a big way. The economy strengthened quickly and by October the unemployment rate was approaching pre-Covid levels, at 5%, after skyrocketing to nearly 15% in April.  

Today, unemployment sits at 4% and inflation is running at a 4.8% annualized rate, the highest in three decades. The difference between 2020 and now is there are nearly 11 million open jobs, the most since the Bureau of Labor Statistics started tracking the data. Rising wages and attractive benefits have failed to attract enough workers, and so the supply chain issues have gotten worse as jobs go unfilled.   

This sharp increase in demand — due to a strong economy, massive stimulus, and unique constraints on global commerce — has put upward pressure on the prices of consumer goods. The price of oil provides an easy and familiar example. Notably, the cost to gas up our cars or heat our homes has soared dramatically. As oil prices increase, so does the cost of transport, which affects almost all consumer goods. Currently, a barrel of oil is $95.  

Blaming the White House for inflation is lazy. Macroeconomics are based on supply and demand, and demand is white hot at the moment. Every administration has dealt with volatile oil prices. Indeed, $100 oil is not remotely novel. Consider this: during George H.W. Bush’s term, in the throes of the Gulf War, oil hit $145 per barrel. At the end of Obama’s second term, 26 price was about $91 per barrel. Since January 2001, oil has fluctuated between a low of $27 and a high of $145 (all during George W. Bush’s presidency) but has risen steadily over the past two decades. Here are the stats: 

During the worst of the pandemic, there was a healthy supply of oil and demand fell off a cliff as global travel ceased overnight. Large oil refiners were paying to offload oil. Headlines like this one from Politico in April 2020 were common: “Oil prices go negative — and Washington is paralyzed over what to do.” And while the president has some influence via the strategic oil reserves and negotiations with OPEC, those tools only affect the supply side of the equation. 

Economics is a cycle. Investing is a cycle. Even our careers go through cycles. And we cannot know with certainty the long-term consequences of measures taken at the crisis points of any of these cycles. Politics has become so polarizing that we pick our sides and blame the other for almost any adverse event, especially when it affects our financial well-being.  

Geopolitics is hot right now because of the tensions in eastern Europe. Beyond the worry of what war brings, Russia is the third largest oil producer in the World behind Saudi Arabia and the United States. The global energy trade may see disruption, and energy prices are likely already reflecting that. It is unlikely, however, that the US consumer’s ability to spend will be dampened. The fundamentals of supply and demand will support the persistence of inflationary pressure, and the occupant of the White House, past or present, has little to do with that.

 

Jeff Liquori is the co-founder and chief Investment officer of Napatree Capital, an investment boutique with offices in Longmeadow as well as Providence and Westerly, R.I.; (401) 437-4730.

 

Changing Landscape Should Leave a Harder Focus on the ‘Long Term’

By Contributor
Special Coverage Wealth Management

Facing New Realities

 

The past few years — and even the past few months — have brought about changes to the landscape that should give individuals reason for thought as they consider their long-term financial goals — and how to reach them. These changes include everything from soaring real estate prices to inflation rates higher than those seen in the past 40 years. Overall, these changes and many others should prompt an even stronger emphasis on the ‘long term’ when it comes to financial planning.

 

By Patricia Matty

 

The pandemic and the resulting environment of the past few years has brought about a lot of changes to the financial advisory world.

While not unique to financial advisory, the widespread use of Zoom (or Microsoft Teams) meetings in lieu of face-to-face interactions has been a big change. This is true for initial meetings of new clients as well as existing client financial planning meetings and account reviews.

As we have all experienced, remote meetings make it much more difficult to get a real sense of someone’s body language, gauge their comfort (or not) with a recommendation, adequate vocalization of their fears, and an increased difficulty in just making a true emotional connection. Aside from the physical aspect of the change, there have been some other repercussions that I would like to focus on. Some of these changes have been driven by the client, the others are being driven by me as the advisor.

On the client driven side, there has been a lot of moving parts. Some of these changes are monetary, some not. Looking at monetary changes:

• Real estate prices have changed drastically over the past several years. For most people real estate is the first or second largest piece of their assets. The upending of the real estate market has greatly increased the value of home equity for a lot of people, which has strengthened their balance sheets. For the Millennials who had not yet entered the market, the price of entry became a lot higher, with parents being asked for help more than ever.

 

• The impressive increase in the stock market over the past two years has altered the client side of the ledger. At the start of the pandemic, many people felt they could never afford to retire. The recent run up has given some hopes of retiring earlier than ever.

• Prices have risen. As a visit to any grocery store or home improvement center will demonstrate, inflation levels have been creeping up.

Patricia Matty

“The gains made in real estate and stocks over the past few years are sometimes making clients too optimistic, and we need to temper expectations.”

On the non-monetary side:

• Many people lost a loved one due to Covid related illnesses. For many, this has them questioning their existing priorities in life. Even if you did not lose a loved one, you probably had severe restrictions on visiting many of them, which has had a similar effect.

• Working from home has caused a reassessment of priorities as well. For those where work from home may continue, they often want to live someplace completely different than where they reside today.

• There is a great pent-up demand for travel. ‘Stuff’ seems to be taking a backseat to experiences and travel.

But as I stated earlier, this isn’t one sided. On the advisory side, we have also seen some changes.

• Bitcoin and other cryptocurrencies now receive a lot more attention;

• The changing client priorities necessitate updating client goals, and therefore financial plans.

• The gains made in real estate and stocks over the past few years are sometimes making clients too optimistic, and we need to temper expectations.

• Increased use of more-sophisticated financial planning software that can be screen shared with clients on Zoom calls.

• And last but certainly not least: needing to incorporate some ‘long term’ in long term financial plans. This is especially true on inflation over time, as well as accounting for lifespans.

It has been quite some time since planners have been faced with an inflationary environment. Rising prices can be devastating to a financial plan if you are not adequately positioned. All too often, we see clients who are overly concerned about short-term market volatility, but turn a blind eye to the long-term effects of rising prices on their spending power. As our sophisticated software consistently demonstrates, however, this is the real risk to achieving your goals over time.

Regarding longevity, it is all too easy to say you and/or your spouse “won’t make it to our 90s” and fail to adequately invest for the long term. Despite COVID, people are living longer than ever, and healthcare continues to improve. Having adequate resources over the long term is essential and requires planning.

With all of the above said, in the wisdom of Forrest Gump, “Life is like a box of chocolates, you never know what you’re going to get.” We don’t know what the stock market, real estate market, inflation, lifespan, and other factors will be over the years to come. So what should you do in light of the evolving changes?

Meet with your advisor. In person if possible, especially if you have significant changes. Life changes, and so do your priorities. Make sure your advisor understands your goals, especially if they have shifted. In addition, have a two-sided dialogue with your advisor, making sure you are comfortable with their recommendations as to how to achieve your goals. u

 

Patricia Matty is senior vice president and financial advisory director at Springfield-based St. Germain Investment Management. She has an extensive education and business background, with 18 years in the financial services industry. Her background is in business management, financial planning and relationship development. She holds Series 7 and 66 designations for securities representatives and investment advisors, earned the Accredited Investment Fiduciary [AIF], and holds the Trust 1 certification; (413) 733-5111.

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