All posts by : beckye@1si.org

submitted by
Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast

The Fed reduced the Fed Funds rate by another quarter point, as expected. This marked the 3rd reduction during 2024, but as we suggested some time back, we will now see a slowdown in the number of Fed interest rate reductions for 2025.  We can expect a hold at the next Fed meeting, or no change to the current Fed Funds rate of 4.5%. This means that interest rates will likely be higher for longer. Higher interest rates have had a significant impact on interest-sensitive sectors like real estate and durable goods manufacturing. Manufacturing has had a greater impact on states like Indiana and Kentucky, where it often reigns as one of the largest economic sectors across state locales. Since higher interest rates ensued back in 2022, Indiana manufacturing employment is down by about 22,000. Kentucky fares better, with a gain of about 3,000 manufacturing jobs since that time. Indiana is a manufacturing-intensive state, with the highest percentage of manufacturing employment in the nation. Kentucky is also in the top 10.    

The higher interest rate impact of slower manufacturing on Indiana is lessened through diversification of an economy, and we can point to regional economies in Indiana for examples.  Kokomo, with 41% of its workforce employed in manufacturing, is experiencing an unemployment rate that exceeds 9%, and the region has added fewer than 1,000 payrolls since last year. Other heavy manufacturing metro areas, like Elkhart-Goshen and Columbus, are also seeing slow payroll growth. Elkhart-Goshen is down slightly and Columbus is under 1,000. The metro area with likely the greatest diversification is perhaps Indianapolis. Less than 10% of the Indianapolis workforce is now employed by manufacturing, and the largest sector, healthcare and social services, employs just under 12% of the workforce. Since last year, Indiana added 45,000 jobs, or a 1.4% growth rate. This is down from a couple of years ago, and largely due to the slowdown we are seeing in manufacturing. Indianapolis, on the other hand, added 30,000 jobs, representing a growth rate of 2.5%;  U.S. payroll growth was only 1.4% over that same period. Indianapolis holds about ½ of all payrolls in Indiana, but since last year, is responsible for 2/3rds of the job growth.   

Interestingly, there are two Indiana metro areas with a heavy concentration of manufacturing, and with job growth rates higher than Indiana and the U.S. Why are these two metro areas achieving higher growth rates in jobs, even with manufacturing being the largest sector in both regions? One possible link might be to education. Both regions are home to major research universities, and college attainment rates are higher than the Indiana average.   

The latest report on metropolitan employment shows Louisville Metro is up by 8,500 payrolls since last year, or 1.2% growth, under Kentucky growth of 1.5% and U.S, growth of 1.4%.  While manufacturing growth in Louisville has slowed, it does not explain the overall slower growth of total payrolls. Back in 2022 and 2023, leisure and hospitality were the major drivers of Louisville Metro payrolls, reaching growth rates as high as 16%, and in both years, leisure and hospitality growth exceeded overall payrolls. During this past year, however, leisure and hospitality growth has slowed, now negative year-over-year for the past 6 months. Two sectors, education and health services along with professional business services, explain about 70% of the job growth over the past year.     Manufacturing still maintains a significant position in Louisville Metro but is no longer the largest industry. Louisville Metro is a service town, with education and health services and professional and business services making up the two largest sectors. 

The latest ISM (Institute for Supply Management) report on manufacturing came in just under 50, slightly under expansion.    New orders and production were both expanding, however, showing some green shoots in manufacturing. Despite higher interest rates, this could be early signs of a nascent recovery in manufacturing for 2025.