Economic Trends and Your CalPERS Retirement: Insights from CalPERS Lead Economist

Nov 1, 2023

Ensuring our members receive their retirement benefits is a top priority for us. That’s why we rely on experts like Lauren Rosborough Watt, lead economist for the CalPERS Investment Office.

We had the opportunity to sit down with Rosborough Watt and learn more about her role, her views on current inflation and recession concerns, and her thoughts on the global economy.


Why Does CalPERS Have an Economist?

Rosborough Watt and her team have a crucial mission: to deliver sustainable retirement benefits to our members and their beneficiaries. They accomplish this by acting as thought leaders in their field. They review external projections of global and U.S. economic activity, analyze growth and inflation, and model scenarios to test the sensitivity of our Fund’s expected returns. They also work with colleagues in our Investment Office’s asset classes to understand how economic trends impact returns.

Understanding the Economy’s Impact on CalPERS Investments

The economy is a major driver of our capital market assumptions and expected future returns, and that drives our strategic asset allocation. Over the long term, the growth rate of an economy is influenced by population and demographic trends, the supply and demand of investments and savings, and labor market productivity. Rosborough Watt’s team seeks to identify business cycle trends and risks to help CalPERS make informed investing decisions to grow our returns and minimize potential losses.

In their work, Rosborough Watt’s team uses all kinds of information: official statistics, data and surveys, and insights from external experts on markets, trends, and geopolitics. They even consider information from organizations like the Office of National Intelligence to assess potential impacts on our asset returns in the long run.

However, Rosborough Watt’s team remains humble, acknowledging that unexpected events can influence financial markets. They interpret and communicate the effects of these events on growth or inflation, often presenting their findings to the CalPERS Board or at stakeholder meetings.

“We’re sharing our interpretation of the current state of the world and the balance of risks, and that helps with more timely investment decisions,” Rosborough Watt says.

The Impact of Inflation on the CalPERS Fund

These days, inflation seems to hit us at every turn, from everyday basics like eggs and bread to bigger-ticket items, like cars and houses. But how does inflation affect the returns of our Fund? Moderate inflation can benefit certain asset classes, such as global equities and real assets.

On the other hand, when inflation is high and driven by persistent supply shock (like during the pandemic), equity markets and fixed income markets can both weaken, as we saw in 2022. Looking ahead, persistent and high inflation can increase uncertainty over the future, which presents both risks and opportunities for the CalPERS Fund.

The Effect of the Last Two Years on Economic Trends

Rosborough Watt emphasizes that economics at CalPERS is not about predicting the future; it’s about helping the fund prepare for what lies ahead. The global pandemic was a significant event, and it caused permanent changes to economic relationships.

For example, the shift toward online purchases accelerated during the pandemic. Consequently, retailers increased investments in technology and e-commerce offerings. Another notable trend was higher-than-expected retirements. We’ve also been reading a lot about on-shoring of supply chains, which means some companies are looking to bring their factories back into the U.S. from overseas.

These three examples show a positive impact on consumption and investment in the near term, boosting economic activity. However, they may also have long-term implications, such as lower labor supply and high-cost production, potentially affecting future economic growth.

When Rosborough Watt presents to the CalPERS Board, she often refers to the balance of risks and preparing for the future. What should the Fund’s leaders be thinking about in the next 5-7 years? Or the very long term, in 20 years?

“When I think about my role in front of the Board, part of it is to try and connect those pieces. What’s happening in the world today?” says Rosborough Watt. “How can I put that in an economic framework to describe the immediate impact on returns? And will what is happening now impact the Fund’s returns in 10 or 20 years’ time?”

Accounting for Baby Boomers in Our Investments

As an example, Rosborough Watt points to demographics as a driver of near-term and long-run returns. During the pandemic, the retiree share of the U.S. population rose to around one and a half percentage points above its pre-pandemic level. This rise was unexpected, it happened quite abruptly, and it had an immediate effect by lowering the supply of available labor. But keep in mind this population was always going to retire; they just retired sooner than we thought.

From a longer-run perspective, baby boomers as a demographic have impacted the U.S. economy since they were born, and as they’ve aged, that impact has changed. From an investment decision-making process, this population affects age-sensitive industries, which influence returns across many asset classes (real estate, and private and public equity). For example, as baby boomers age, certain types of businesses grow, such as healthcare and aged care, and housing choices may change. It’s important to note the process of how we invest doesn’t change—what we’re investing in does as demographics shift.

Bright Spots on the Economic Horizon

“When I think about the U.S. economy, it’s very resilient, and it’s very flexible,” says Rosborough Watt. “It’s one of the reasons why the U.S. economy performed so well coming out of the pandemic. It’s also one of the reasons why the U.S. economy grew to be the powerhouse that it is in the post WWII era, and we should celebrate that ability to adapt and innovate.”

Looking ahead, there are a number of challenges as the economy settles into its post-pandemic phase. The Federal Reserve has raised interest rates, pushing mortgage rates and financing costs higher, resulting in tighter financial conditions for households and businesses.

In addition, the recent turmoil in some regional banks highlights the pressures caused by a slowing economy amid high inflation and high interest rates. For businesses that are seeking lending but are faced with regional banks retrenching and consolidating, there is the potential for private lenders, such as CalPERS, to step in. This has a dual benefit: we could provide lending for high-quality assets held by businesses and provide sufficient returns for our members and beneficiaries.

To secure potential benefits such as these, the CalPERS Investment Office needs to be flexible and adaptable to changing economic circumstances…and constantly scanning the future for opportunities, like Rosborough Watt’s team does each day.

Originally Published June 2023