When writing about the U.S. economy in 2025, payroll expansion is not what we would describe. The U.S. economy averaged just 15,000 jobs per month, one of the weakest job growth rates in more than 20 years outside of recessionary periods.
As we begin 2026, there is little evidence of a rebound. Last month, the economy lost an unexpected 92,000 jobs, well below expectations of a 60,000 gain. Revisions added to the weakness, with December payrolls revised from positive to negative and January’s gains trimmed by another 4,000 jobs.
Breaking the report down by sector does not improve the picture. After a brief increase in January, manufacturing returned to shedding jobs in February, losing 12,000 positions. Transportation and warehousing continued to decline, down another 11,000 jobs, this after adding 24,000 jobs in the same month a year ago.
Health care, one of the primary drivers of job growth over the past year, lost 19,000 jobs in February. While some have attributed the decline to temporary factors, such as labor disruptions on the West Coast, the report highlights how dependent overall job growth has become on this sector. When health care slows, overall job growth follows.
Leisure and hospitality also lost 27,000 jobs, reflecting ongoing challenges tied to higher costs and shifting consumer behavior.
The slowdown in hiring is now showing up more broadly in economic activity. The latest report on gross domestic product (GDP) indicates that fourth-quarter growth was just 0.7%, down from the prior estimate of 1.4%. The revision reflects weaker consumer spending, softer exports, and a decline in government spending, including effects tied to the fourth-quarter government shutdown.
At the same time, inflation remains sticky. The latest Consumer Price Index (CPI) shows inflation continuing to run above the Federal Reserve’s 2% target, while core producer prices, excluding food and energy, are approaching 4%. The preferred Fed inflation measure, minus food and energy, is running above 3%, well above the desired 2% target.
While consumers continue to feel the impact of higher prices, particularly at the gas pump, wage growth has remained strong. Average hourly earnings increased by 3.8% over the past year, outpacing inflation, which has been running closer to 2.5%. This has helped support consumer spending, although rising gasoline and diesel prices will create headwinds.
Locally, the picture is more encouraging. Floyd and Clark Counties have continued to show steady growth. As of the third quarter, the two counties combined added nearly 1,000 jobs, exceeding the total number of jobs added across the five Southern Indiana counties that make up the Louisville Metro portion of the region.
Health care and social services led the way, adding 967 jobs and accounting for the majority of gains. Construction remained strong, adding another 253 jobs. However, transportation and warehousing declined by 453 jobs, and manufacturing employment fell by 71.
The economy is at a crossroads. Volatility in equity markets could dampen spending among higher-income households that have been the most resilient. Rising fuel costs are already weighing on consumer sentiment and risk spilling over into broader economic activity.
The combination of slower growth and persistent inflation raises the possibility of a stagflationary environment, an outcome that would place additional strain on consumers and businesses alike.
The economy is not currently in a recession, but the risks are rising, particularly if the U.S. labor market continues to show weak or declining momentum.
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