The Macroeconomic Environment
U.S. Economy Remains Resilient in 2025
Economists looked forward to 2025 with optimism on the heels of a year that had exceeded the expectations of some forecasters in 2024. In November 2024, Federal Reserve Bank of Philadelphia’s “Fourth Quarter 2024 Survey of Professional Forecasters” reported the median outlooks for 2025 were real gross domestic product (GDP) gains of 2.2%, headline CPI registering at 2.4%, and an unemployment rate of 4.3%.1 But 2025 started off with a surprise. GDP shrank in the first quarter, driven primarily by rising imports and reduced federal government spending. This rise in imports was paired with a significant increase in private inventories as imports were moved forward in anticipation of new tariffs. Imports then declined rapidly in the second quarter, and inventories also fell substantially. While imports continued to fall in Q3, the decline was at a significantly slower rate than in the second quarter.
Seasonally adjusted annualized gains in GDP for the first three quarters of 2025 were -0.6%, 3.8% and 4.3%.
On average through the first three quarters of 2025, the individual items that contributed the most to overall GDP gains were consumer spending on health care services — a continuation of a sustained long-term trend and not at all something unique to 2025 — followed by business investment in information processing equipment and software. These latter two items illustrate the role that technology spending, including artificial intelligence (AI), played in driving economic gains in 2025.2
Inflation stabilizes as Fed steps back
Consumer price inflation started the year above the Federal Reserve’s (Fed) long-term goal of 2.0%, registering at 3.0% in January. Since June 2023, sharp declines in inflation have ceased, and any improvements have become incremental. On average, inflation rates were lower in 2025 than they were in 2024, but over the course of the year the inflation rate saw very little downward movement as the Fed turned its focus towards the employment situation.
The Fed held its federal funds target range steady for most of 2025 following three rate cuts in the last four months of 2024. Inflation remained elevated above the Fed’s target range while labor market conditions remained solid. In September 2025 the Fed announced that it judged the downside risks to employment had risen and cut the federal funds rate by a quarter percentage point. Two more quarter point cuts followed in October and December as the unemployment rate continued to edge up and the target range for the federal funds rate finished 2025 at 3.5% to 3.75%. The Fed’s projection materials released in December indicate that members expect the federal funds rate to end 2026 at 3.4%, signaling that the Fed expects to mostly hold rates steady in 2026.3
The labor market begins to cool
Unemployment registered at 4.0% in January, marking the ninth consecutive month between 4.0% and 4.2%. The rate stayed in this narrow band through July before starting to drift up in August. Unemployment reached 4.5% in November, its highest point since October 2021, before falling to 4.4% to finish the year. In the minutes for its December meeting, the Fed offered evidence of a cooling labor market by citing: a slowdown in the growth of overall employment levels, a rise in initial claims for unemployment insurance benefits, declining job openings alongside an uptick in layoffs, and survey measures indicating that the balance between labor demand and supply was weakening.
Unemployment is generally considered to be in a healthy spot when it falls between 3.0% and 5.0%, however the Fed determined that the uncertainty about the economic outlook was elevated and the downside risks to employment had risen enough to justify some countermeasures in the form of three small rate cuts.
Equity markets continue growth
U.S. equity markets delivered positive results during the year, with the four major U.S. indices – S&P 500, Dow Jones Industrial Average, Nasdaq Composite, and Russell 2000 – all reaching multiple all-time highs. On the year, all four indices rose at double-digit rates: 20.4% (NASDAQ), 16.4% (S&P 500), 13.0% (DJIA), and 11.3% (Russell 2000). This was the third year of gains following declines in 2022.
Performance, however, remained concentrated among a relatively small group of large-cap technology companies, particularly those with significant exposure to artificial intelligence, which continued to account for a disproportionate share of index returns. Market participation outside of these leaders improved modestly but remained uneven.
Organic growth slows
2025 was another year of growth for independent insurance brokers. However, while total written property and casualty (P&C) premiums rose to a new high – organic growth rates for both public and independent brokers saw a decline from levels in the prior four years. Organic growth for independent brokers, while down from previous years, appears to be holding on to higher levels than the public brokers.
In 2025, public brokers averaged 5.7% organic growth (down from 8.7% in 2024), while all firms averaged 8.0% (down from 9.0% in 2024).
Organic growth often tracks with movements in GDP growth. However, in the previous few years, the hard market had supported broker organic growth at elevated levels despite more moderate GDP increases. Insurance rates softened in 2025 to a point where many lines are now considered to be in a soft market.
Commercial P&C premiums rose by just 0.2%, on average, across all lines of business in the fourth quarter. That was down from 4.2%, 3.7%, and 1.6% in the first three quarters of the year. Alongside the minimal overall commercial P&C premium growth in the fourth quarter, many lines recorded declines, including directors and officers liability (-3.8%), cyber (-3.3%), employment practices (-2.6%), and business interruption (-0.7%).4
Underwriting profits rise in 2025
U.S. equity markets delivered positive results during the year, with the four major U.S. indices – S&P 500, Dow Jones Industrial Average, Nasdaq Composite, and Russell 2000 – all reaching multiple all-time highs. On the year, all four indices rose at double-digit rates: 20.4% (NASDAQ), 16.4% (S&P 500), 13.0% (DJIA), and 11.3% (Russell 2000). This was the third year of gains following declines in 2022.
Performance, however, remained concentrated among a relatively small group of large-cap technology companies, particularly those with significant exposure to artificial intelligence, which continued to account for a disproportionate share of index returns. Market participation outside of these leaders improved modestly but remained uneven.
In 2025, while the Los Angeles wildfires started the year off with significant catastrophe losses, no hurricanes made landfall in the U.S. In general, it does seem as if the industry is beginning to adjust to the increasing regularity of extreme weather events, as evidenced by the significant rise in the size of the excess and surplus (E&S) lines market. MarshBerry estimates the E&S market generated ~$230 billion in premiums in 2025, which comprised 21.1% of all premiums placed in the U.S. P&C market. This is up from a 9.9% market share in 2015.
While strong underwriting profitability can mean more profit-sharing paid to brokers, it also often means carriers are granted greater pricing flexibility, which could limit the need for significant rate increases. MarshBerry’s data indicate that, in general, brokers have benefitted overall from rising premiums, with organic growth rates in recent years registering near record highs despite low levels of sales velocity. Consequently, as rate changes enter soft territory, organic growth rates for the industry as an aggregate are expected to slow.
2026 Economic Outlook
Forecasters expect a mild 2026, with the Federal Reserve Bank of Philadelphia’s “Fourth Quarter 2025 Survey of Professional Forecasters” showing a median GDP growth outlook of 1.8% for 2026, a slight slowdown from the median expectation for 2025.
Recession fears are present, with risk of a negative GDP quarter ranging from 23.6% to 26.3% for the four quarters of 2026. Inflation has settled in at a slightly elevated rate above the Fed’s target range, and forecasters do not expect it to decline much in 2026. Unemployment is expected to hold steady in the mid 4% range.
Consumer confidence has generally deteriorated over the course of the year with the University of Michigan Index of Consumer Sentiment and The Conference Board’s Consumer Confidence Index both seeing some volatility but on the whole declining for the year. Labor market expectations and the persistence of high prices are the themes driving these declines.
In comparison, business confidence seems to be holding strong, with the NFIB Small Business Optimism Index falling slightly from December 2024’s reading but still holding near or above 100 for the year as firms expected sales to continue to rise. However, uncertainty has also risen for these firms, and many have reported concerns around capital expenditure plans in the next couple of quarters.
The Fed has brought interest rates down from the range of 5.25% to 5.50% to a range of 3.5% to 3.75% over the course of 2024 and 2025, citing rising downside risks to employment. Uncertainty in the economic outlook has drifted up since last year.
The Philadelphia Fed’s fourth quarter survey had reported a median risk of a negative quarter ranging from 15.0% to 23.3% for each quarter of 2025, in comparison to the 23.6% to 26.3% range for 2026.
Overall, 2026 is expected to bring slower growth and persistent uncertainty. While risks of recession have increased, structural strengths and cautious monetary policy suggest a measured, rather than severe, economic slowdown.
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