Looking Beyond the Headline: Encouraging Signs in Indiana’s Labor Market

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

The last 12 months would not be described as a robust labor market. Indiana has now recorded seven consecutive months of negative year-over-year job changes. Outside of an official recession, this is the longest streak of negative year-over-year declines since 2003. Negative year-over-year job losses typically coincide with a recession, but no recession has occurred, making this trend even more concerning for Indiana.

Despite the overall weakness in payroll growth, there have been some encouraging signs that mirror positive developments in the national labor market. Education and healthcare has been the leading sector supporting payrolls over the past year, with the latest data showing a gain of 8,000 jobs. This relationship is typical. When overall job growth weakens, healthcare is often the most resilient sector and continues to expand. During the past four recessions, overall payrolls declined while education and health care remained in positive territory.

One bright spot in the Indiana labor market is growth in professional and business services, which is up 5,000 jobs over the year. Growth in professional and business services is often associated with business expansion and increasing demand for highly skilled workers. This time last year, employment in the sector was down 3,000 jobs, and overall payroll growth subsequently contracted. As a result, growth among professional and business services workers, often referred to as knowledge workers, is an encouraging sign for the broader economy.

Retail employment is also up by 5,000 jobs over the year. Retail employment gains are further evidence of consumer resilience. Despite higher interest rates and elevated prices, households have continued to spend, supporting retail activity and broader economic growth.

The largest declines in private-sector employment have occurred in manufacturing, transportation and warehousing, and leisure and hospitality. However, the most significant year-over-year decline has been in government employment, which is down nearly 17,000 jobs from a year ago. In fact, if government employment had remained flat, Indiana would be reporting growth in overall payrolls.

As we move through 2026, payroll growth should become more broad-based, allowing Indiana to return to positive year-over-year job gains. There are, however, some storm clouds on the horizon in the form of higher interest rates. Elevated rates were a major factor behind the slowdown in manufacturing, and persistently high borrowing costs could restrain the recovery that is beginning to emerge.

One of the conclusions from my recent Mid-Year Economic Outlook was that payroll growth would begin to accelerate both regionally and nationally. The latest national employment report showed the U.S. economy added 172,000 jobs, well above market expectations. Equity markets responded with one of their sharpest declines of the year. Stronger job growth combined with stubborn inflation suggests interest rates may remain higher for longer.

Even so, I expect inflation to trend lower during the remainder of the year. Both the Consumer Price Index and the Federal Reserve’s preferred PCE Price Index continue to reflect inflationary pressures, but several factors should contribute to moderation. Lower energy prices would contribute to easing headline inflation. Core inflation should also ease as the supply side of the economy continues to improve.

Manufacturing indicators such as the ISM Index have strengthened, while durable goods orders, factory orders, and industrial production have all shown improvement. This should bode well for Indiana. Job openings are also beginning to trend higher as the labor market recovers from the turbulence of the past year.

Indiana’s labor market is not yet firing on all cylinders however, but the underlying trends are positive. The challenge for the remainder of the year will be whether inflation and interest rates allow that recovery to broaden across more sectors of the economy. The likely scenario is that Indiana should soon move beyond its period of negative year-over-year job changes as payroll growth accelerates during the second half of the year.

Thank You for Renewing Your Membership | May 2026

One Southern Indiana would like to thank the following members for renewing their membership during the month of May 2026.

Quarter Century Club (25 years or more)Member Since
Metro United Way1973
Better Business Bureau Serving Louisville and South Central Indiana1985
WAVE 3 News1988
Rasmussen Chiropractic LLC1990
WesBanco Bank, Inc. 1994
Caesars Southern Indiana1996
  
10-24 Years 
Voluforms2003
Nu-Yale2008
Benchmark Stone Products2010
LBMC2011
Rauch Industries2011
Owings Patterns Inc.2011
New Albany Housing Authority2012
Discount Labels, Inc.2013
Kyana Packaging Solutions2013
Elite Printing Resources, LLC2014
Bennett & Bennett Financial2015
C2 Strategic Communications LLC2015
  
5-9 Years 
Excel Services Inc.2018
Shepherd Insurance – New Albany2018
Maker13 LLC2019
Mansion 18862021
Harford Mutual Insurance Group2021
Kochert Insurance2021
812 Hemp2021
  
2-4 Years 
Louisville Painting Company LLC2023
Prosser Alumni Association Inc. 2023
Mitch Craig Heating & Cooling2023
Southern Homes Realty2023
LPX Group2023
Hunter Station Pizza Company2024
New York Life Insurance Company – Michael Fisher, Managing Partner2024
The Miller Company2024
Kentucky ElderLaw, PLLC2024
LouCity 2024
  
One Year 
Bennett Place Assisted Living2025
BRE, Inc2025
Belterra Casino Resort2025
Panda Pro Cleaners2025
SME – New Albany, IN2025
Aypa Power2025
CASA Of Floyd County2025
Artisan Wealth Management2025

Thank You for Renewing Your Membership | April 2026

One Southern Indiana would like to thank the following members for renewing their membership in the month of April 2026.

Quarter Century Club (25 years or more)Member Since
Aebersold Florist, Inc.1973
AT&T Indiana1976
Cody & Neely, Law Offices1976
Carman Industries1977
Samtec, Inc.1977
SoIN Tourism1981
Clarksville Community Schools1984
Kaiser Wholesale Inc.1985
TowerPinkster1988
New Hope Services, Inc.1989
Christ Gospel Churches Intl., Inc.1990
Dan Cristiani Excavating Co., Inc.1990
Kightlinger & Gray, LLP 1991
Koerber’s Fine Jewelry1991
Ross Bros. Automatic Transmission Service, Inc.1991
United Dynamics, Inc.1991
DKN Architects1994
Strandz and Threadz1995
Kentucky Derby Festival, Inc.1997
Land-Mill Developers, Inc.1998
  
10-24 Years 
German American Bank2003
Ecotech Waste Logistics2007
Sellersburg Metals & Welding Co., Inc.2008
Sapp Tax and Financial Services2008
Campbells Snack2009
FormWood Industries, Inc.2009
Town of Clarksville2009
Missy’s Valet Service, LLC2011
Alpha Energy Solutions2011
Coyle Chevrolet GMC & Nissan2011
AccessiCare Elder Home Care2012
Rudy and Associates2013
University of Louisville – College of Business2013
Big O Tires of New Albany2013
Angel Hands Therapeutic Massage, Inc.2014
Telania, LLC2014
Lochmueller Group, Inc.2014
Healthy Living and Beyond2014
SK Sign & Banner2014
Schuler Bauer Real Estate Services – Cory Williams2014
  
5-9 Years 
Facilities Management Services, Inc.2017
Borden-Henryville School Corporation2017
AK Studio, LLC2018
Payroll Vault2018
StoneWater Acupuncture & Chiropractic2018
Midwest Metal Works, Inc.2018
Storming Crab2018
Riley Dental Group2018
American Shooters Indoor Gun Range2018
Purple Pearl Skin & Beauty2018
Masters’ Supply, Inc.2019
Patrick Johnson Landscaping LLC2019
Louisville Chocolate Fountain, LLC2019
SEEWER Insurance Group2019
PayFWDs2019
Chicken Salad Chick2019
Martin’s Body Shop2020
J.F. Hilliard Company LLC2020
Kratz Sporting Goods2020
Qualified Staffing2020
The Ridge Liquors2021
Silver Creek School Corporation2021
  
2-4 Years 
20/twenty Strategic Consultants2022
713 Architects, PLLC2022
BoomBozz Pizza & Watch Bar2022
Hotworx- Jeffersonville2022
Joash, Inc.2022
Malone Workforce Solutions 2022
Manitowoc2022
B. Redmon Insurance Partners, LLC2023
Kaczmarek Contracting LLC2023
The Prologue Venue2023
Innovators Insurance Group LLC2023
Prosource2023
Transit Authority of River City-TARC2023
Transformative Sales Systems LLC2023
The Community Kitchen2023
Holiday World & Splashin’ Safari 2023
Floyd County Brewing Company2024
Elite Primary Care and Wellness LLC2024
Julia Jenkins Dawson, DMD2024
Incipio Workforce Solutions 2024
DC Develop2024
  
One Year 
MPC Promotions2025
FocusCFO2025
Rumpke Waste & Recycling2025
Ink + Insight Digital Marketing2025
THRIVE RCO2025
The Bedrock Group2025
Heritage Federal Credit Union2025
SHARON HANDY2025
MAS Consulting, LLC2025
Kentucky Opera2025
Your Home Roofing2025
Calhoun Construction2025
K.M. Stemler Company, Inc.2025

Welcome New Members | April 2026

Changing Drivers of Growth in the U.S. Economy

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

The consumer has been the dominant force behind U.S. economic growth over the past several years. Despite high inflation and persistently weak consumer sentiment, households continued to spend, driving much of the nation’s growth as measured by gross domestic product (GDP).

Over the past eight quarters, real GDP growth averaged 2.23% per quarter. Consumer spending accounted for roughly 83% of that growth, well above its traditional share of the economy.

However, the latest GDP report suggests that some of the headwinds facing consumers, particularly higher gasoline prices and a slowing labor market, may finally be having an impact.

Preliminary estimates for the first quarter show a notable shift. The consumer’s contribution to GDP fell to approximately 54%, down sharply from the 83% average over the prior eight quarters. Goods spending weighed on overall growth, with recreational goods and vehicles having the largest negative impact, reducing GDP by 0.22 percentage points.

The U.S. economy is primarily driven by services, and it was services spending that continued to support overall consumption. Given the shift toward an experience-based economy following the COVID shock, one might expect spending on experiences to remain strong.

However, food services and accommodations, a reasonable proxy for the experience economy, also detracted from growth, shaving 0.14 percentage points from GDP. Instead, nearly half of all services spending growth came from health care. This is consistent with trends in the labor market, where health care has been responsible for a disproportionate share of recent job gains.

Taken together, the report points to a consumer that may be beginning to weaken. This matters because of the outsized role consumers have played in sustaining economic growth.

If the consumer is losing momentum, something else must take its place. Increasingly, that “something” is artificial intelligence.

Gross private domestic investment, the category that includes spending on equipment, software, and structures, accounted for nearly 75% of GDP growth in the first quarter. Investment in information processing equipment and software, much of it tied to artificial intelligence, drove nearly all of that growth. Residential investment, by contrast, reduced overall growth.

Net exports were the largest drag on GDP. The negative contribution from imports nearly doubled the positive contribution from exports. Notably, much of the information processing equipment fueling AI investment is imported, reinforcing this drag on growth.

A great deal is now riding on artificial intelligence. Equity markets are near all-time highs, driven in large part by technology firms making substantial AI investments. Expectations for productivity gains are high, with many anticipating that AI will help ease inflationary pressures and create room for the Federal Reserve to lower interest rates.

For the past several years, the economic engine has been the American consumer. Consumer spending will continue to represent almost 70% of the U.S. economy, but investment in artificial intelligence is covering for other developing weaknesses. An economy relying less on the consumer and more on capital investment, particularly in emerging technologies, raises important questions about the sustainability and balance of future growth. The consumer has long been the foundation of the U.S. economy, and we can expect that to remain. Replacing that foundation, even partially, is not without risk. With a labor market that has been propped up by healthcare hiring, and substantial growth now driven by AI investments, a good question might be about the sustainability and duration of both.

Why the Fed May Need to Act Sooner Than Expected

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

Inflation remains sticky, but a pathway to a rate cut is emerging

Financial markets are currently anticipating no interest rate cuts by the Federal Reserve this year. In fact, expectations have shifted dramatically, with markets now pricing in the next rate cut as late as June 2027, compared to expectations of three cuts at the beginning of this year.

While financial markets are not pricing in a cut until next year, the Fed should, and likely will, reduce rates this year.

The Federal Reserve operates under a Congressionally mandated dual mandate: to promote stable employment and low inflation. The current policy framework targets an inflation rate of 2%.

One of the challenges with the dual mandate is that these objectives can come into conflict. Strong employment growth, for example, can generate upward pressure on inflation, prompting the Fed to raise interest rates to slow the economy and bring inflation back toward its target.

Conversely, weak employment growth is often associated with lower inflation, typically during or near recessionary periods. In that case, the Fed will place greater emphasis on supporting employment.

In both scenarios, rate cuts are used to stimulate economic activity, while rate increases act as a brake to cool growth and inflation.

While the Fed remains focused on inflation, it is past time to shift greater emphasis toward the employment side of the mandate. Current labor market conditions justify a rate cut, not in June 2027, but sooner, potentially at one of the upcoming meetings.

Start with employment growth. Over 2025, job gains averaged just 15,000 per month, making it one of the weakest years of employment growth in more than two decades outside of recessionary periods. Importantly, much of that growth has been concentrated in health care. Excluding that sector, overall employment growth would be flat to negative, hardly indicative of a stable labor market.

Last month’s employment report came in stronger than expected, but the underlying details were less encouraging. Health care again accounted for a significant share of job gains, while the labor force participation rate declined and overall labor force growth softened.

Unemployment claims remain low, but hiring activity has slowed considerably. Employers are holding back. A rate cut would help stimulate demand and encourage firms to expand hiring.

On the inflation side, headline measures continue to run above the Fed’s 2% target. Recent increases in the Consumer Price Index (CPI) were influenced in part by higher energy prices, driven by geopolitical tensions and a temporary spike in oil prices.

The Fed, however, focuses more closely on core inflation, which excludes food and energy. Core CPI has been more subdued, rising 2.6% over the past year. On a monthly basis, recent increases suggest inflation is running closer to a 2.4% annualized pace, still above target, but moving in the right direction.

The Fed’s preferred measure, the Personal Consumption Expenditures (PCE) price index, remains somewhat elevated. Core PCE increased 0.4% last month and is running near 3% year-over-year. While still above target, there are reasons to expect moderation in the months ahead.

Concerns about stagflation, a combination of slower growth and persistent inflation, remain valid. However, with geopolitical pressures potentially easing and oil prices stabilizing, headline inflation should begin to move lower.

In this environment, the “stag” is likely to outweigh the “flation.” Slowing employment growth will push the Fed toward a more accommodative stance.

At the same time, gains in productivity, driven by technological investment and artificial intelligence, may help ease inflationary pressures, giving the Fed additional room to cut rates without reigniting inflation.

The Fed does not need to wait until 2027. The conditions for a rate cut are beginning to fall into place, and the window for action is opening sooner rather than later.

Welcome New Members | March 2026

Thank You for Renewing Your Membership | March 2026

One Southern Indiana would like to thank the following members for renewing their membership during the month of March 2026.

Quarter Century Club (25 years or more)Member Since
H&H Design-Build1976
Ricke Financial Advisory Group1977
Jeffersonville Housing Authority1984
Schuler Bauer Real Estate Services1985
News and Tribune1985
City of Charlestown1985
LifeSpring Health Systems1986
Jeffersonville Township Public Library1991
The Salvation Army1996
River Ridge Development Authority2001
  
10-24 Years 
Budget Services & Supplies, LLC2004
Cherry Bekaert (MCM CPAs & Advisors)2006
Harding, Shymanski & Company, P.S.C.2008
Delaco Kasle Processing Indiana2008
Delta Services LLC2009
Kentuckiana Wood Products, Inc.2011
Jones, Nale & Mattingly PLC2012
FBT Gibbons, LLP2012
Silver Heights Camp & Retreat Center2013
Schmitt Furniture Co.2013
Air Hydro Power2013
Nugent Sand Company2013
Semonin Realtors2014
Polaris Travel Experts2015
HMC Service Company, Inc.2015
Red7e2015
RE/MAX Pat Harrison Enterprises2016
Cardinal Pointe Financial Group2016
  
5-9 Years 
CE Hughes Milling, Inc.2017
The Mansion on Main2018
Riley Dental Group2018
Arnold Painting, LLC2019
Naked By Sunday2019
Clark’s Snacks2019
SERVPRO of Floyd, Clark, Harrison, Perry, Crawford, Orange, Washington & Scott Counties2020
Multiplex – a Welbilt Brand2020
Sleepy Rooster Morning Kitchen2020
Miranda Construction 2021
  
2-4 Years 
Medline Industries2022
Matrix Integration, LLC2022
BAYA – Beautiful as You Are2022
Operation Parent Inc2022
OHM Advisors2023
Fistful Craft Restaurant & Brewery2023
O.K.I Furniture Fair2023
Louisville Painting Company LLC2023
Rise Foundation, Inc.2023
Commonwealth Pain and Spine2023
NAMI Louisville2023
Cambria Hotel Louisville Downtown Whiskey Row2024
Andes Roofing2024
Small Talk Pediatric Therapy 2024
Floyd County Sheriff’s Office2024
ADE Food African Kitchen & Catering Services2024
  
One Year 
Crowe, LLP2025
Tailored Cleaning Services2025
The Jefferson2025
Enterprise Truck Rental2025
ID+A2025
Ashley|Rountree and Associates2025
Stonemark Granite2025
Commonwealth Credit Union2025
CS PowerTech2025

A Strong Jobs Report—With Some Important Caveats

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

Over the past couple of weeks, setting aside the recent stock market volatility, the incoming economic data have leaned positive. The main takeaway is that the Federal Reserve will likely push back any rate cuts that were previously expected.

The biggest positive surprise came from the monthly jobs report. The consensus forecast called for an increase of 60,000 jobs, but the economy added 178,000. Private sector job growth was even stronger, with 186,000 jobs added. The unemployment rate declined to 4.3%.

One sector that has been shedding jobs showed a modest pickup. Manufacturing added 15,000 jobs, another sign that the sector may be seeing some green shoots after a couple of years of contraction.

It was not all positive, however. The labor force participation rate declined by one-tenth of a percentage point, and the labor force itself shrank by nearly 400,000 workers. Payroll revisions for January and February showed 7,000 fewer jobs than previously estimated.

And, similar to recent trends, a large share of job growth continues to come from healthcare. That is not necessarily a negative, but it does highlight that job growth outside of healthcare has slowed considerably. Since 2024, job growth in all other sectors combined is down more than 300,000 jobs, while healthcare employment has increased by nearly 900,000. The broader economy’s job engine, outside of healthcare, remains stuck.

Job openings declined from the prior month but came in slightly above expectations. Hiring, however, dropped sharply, with hires falling significantly from January levels. Excluding the COVID shock, this marks the steepest decline in hiring since the series began in 2000. In fact, hiring did not fall as sharply during the Great Recession as it did in February of this year.

While February represents only one data point, the magnitude of the decline provides further evidence of what has been described as a “no hire–no fire” economy. The gap between unemployed workers and job openings has widened, suggesting that the job market is becoming more competitive for those seeking employment. At the same time, layoffs, as measured by weekly unemployment claims, remain at very low levels.

We have discussed signs of improvement in manufacturing in recent weeks, and those signals continue to emerge. The latest ISM (Institute for Supply Management) manufacturing report showed additional expansion in March, marking three consecutive months of growth. Both new orders and production increased, pointing to a more positive trajectory for the sector.

However, the ISM report also indicated continued contraction in manufacturing employment. While the March jobs report showed a gain in manufacturing jobs, Eye on the Economy does not expect a surge in manufacturing employment, even with potential reshoring as supply chains adjust to ongoing trade policy uncertainty. Moving production from lower-cost regions to higher-cost environments does not necessarily translate into increased payrolls. To remain globally competitive, manufacturers will likely rely more on capital investment and automation. This is positive for the U.S. economy, but not necessarily for employment growth in that sector.

Recent data move us further away from an imminent recession, but stagflation remains a risk. Inflation continues to prove sticky, and with energy prices on the rise, price pressures may persist.

The latest jobs report was encouraging and helped reverse some recent weakness in job growth. However, the gains are not broadly distributed across the economy. For many, a more competitive job market will feel like a recession, even if the data say otherwise. And for consumers, higher gas prices ensure they won’t need a data release to feel it.