What to Expect in 2026: Regional Strength Meets National Softening

by with No Comment 1si NewsEconomic Development

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

–A summary of my Louisville–Southern Indiana 2026 forecast as presented at this year’s Futurecast.

The 2025 economic outlook anticipated faster payroll growth and an unemployment rate near 4 percent. We also expected the U.S. to avoid a recession, supported by continued resilience from the American consumer. As of late 2025, that assessment has held up. Payrolls in the Louisville Metro area are up about 5,000 jobs from a year ago—though this excludes a few months of data due to the federal shutdown—and the unemployment rate remains at 4 percent. Consumers continued spending throughout 2025, but recent indicators suggest a possible shift in the type and pace of spending as we move into 2026.

Outlook for 2026

For 2026, the region should not expect a significant acceleration in growth. A softening national labor market is likely to ease consumer spending, and because Louisville’s economy closely mirrors national trends, local growth will moderate. Payroll gains will likely fall below 10,000 jobs, compared with close to that number in 2025. The unemployment rate is expected to rise modestly, drifting toward 4.5 percent and possibly approaching 5 percent by year-end. This represents a slowing, not a reversal, of local economic momentum.

Sector Performance

Education and health services remain the region’s strongest sector. It added nearly 2,000 jobs last year and 6,000 jobs over the past two years, almost half of all net new jobs in that period. Professional and business services, the region’s second-largest sector, grew by just under 1,000 jobs. Retail trade added roughly 1,000 positions, reversing last year’s decline, while construction continued its strong performance with about 2,000 new jobs, supported in part by major projects such as the Meta facility in Clark County.

Manufacturing, Louisville’s third-largest sector, remains in positive territory but only slightly. Tariffs, slower global demand, softening new orders, and weaker unfilled-order levels continue to weigh on the sector. The ISM Manufacturing Index remains below 50, signaling contraction, and both the employment and production components have fallen back into negative territory after brief improvement early in the year. Transportation and warehousing, a major economic pillar for the region, also posted job losses of around 1,000, reflecting a slowdown in global shipping tied to tariffs and supply-chain adjustments. Leisure and hospitality declined by roughly 1,000 jobs after strong post-pandemic growth.

National Indicators and Local Implications

With limited BLS data during the federal shutdown, alternative indicators point to a broader national slowdown. The ADP report showed private-sector job gains of only 42,000 in October, the first positive reading since July.  Small businesses, those employing fewer than 20 workers, are hiring at the slowest pace since the Great Recession. Firms with 20 to 49 employees have had negative year-over-year job growth all year, the weakest since 2011. The NFIB survey shows declining small-business optimism and reduced hiring plans. Challenger, Gray & Christmas reports layoffs at the highest levels since the Great Recession, excluding the pandemic.

Why does this matter for Louisville? Because nearly half of U.S. workers are employed by small businesses, and small-business pullbacks often signal broader economic cooling.

Consumer spending has carried the U.S. economy for three years, even through 40-year-high inflation in 2022. Personal consumption expenditures have outpaced overall GDP in six separate quarters since then. But consumer sentiment indicators are weakening: households report the worst financial conditions in six years, buying conditions for durable goods are near 15-year lows, and concerns about job loss are the highest since the pandemic. A softening labor market or a decline in equity values could prompt households to reduce spending, which would affect Louisville’s consumer-driven sectors.

Local foot-traffic data across Louisville Metro already show signs of restraint. Restaurant visits are down 3.2 percent, bars and pubs down 9 percent, liquor stores down 5 percent, and beauty and spa visits down 2.4 percent.

Southern Indiana

Southern Indiana continues to be one of the region’s bright spots. It leads all Indiana metro areas in net domestic migration, supporting labor-force expansion and employment growth. The region has avoided overall payroll declines since 2021. Early 2025 data show modest declines in manufacturing, transportation, and professional services, but health care and social services added 935 jobs in one quarter—more than the net gain for the region—continuing a three-quarter trend of sectoral dominance.

Long-Term Challenges

Indiana’s college attainment levels remain a structural concern. While the number of U.S. workers with bachelor’s degrees rose from 36 million in 2001 to 66 million in 2025, the number of workers with only a high-school diploma remained flat. Indiana’s attainment rate of 29 percent ranks 43rd nationally, and the state’s college-going rate has fallen from 65 percent to just over 50 percent. Over the past five years, Indiana employers posted 900,000 jobs requiring a high-school diploma but 1.35 million requiring education beyond high school. Long-term economic competitiveness will depend on reversing these educational trends.

Conclusion

For 2026, the Louisville Metro and Southern Indiana region should expect slower but still positive growth. Payrolls will rise modestly, unemployment will edge higher, and consumer activity will soften. While tariff uncertainty and national cooling present challenges, a recession is not currently in the outlook. The year ahead will be defined by sub-trend growth, cautious hiring, and heightened sensitivity to national economic signals.

The Consumer Engine Is Still Running – But for How Long?

by with No Comment 1si NewsEconomic Development

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

After a long drought of government economic releases, we finally got a key update last week: the Consumer Price Index (CPI) from the Bureau of Labor Statistics. The report came a little later than usual because of the government shutdown, but it was important enough to call BLS staff back to work to calculate the annual cost-of-living adjustment for Social Security recipients.

Inflation inched up slightly from the prior month, with the annual rate rising back to 3%. That was a bit less than expected, and Wall Street celebrated. The Dow surged nearly 500 points on the day, as investors bet that the softer inflation data boosted the odds of a Federal Reserve rate cut next week. The probability of an October cut now sits near 100%, and markets are also pricing in another cut by December with odds above 90%.

With the shutdown delaying federal releases, labor-market data have been limited. The most recent ADP report (a private sector employment report) showed national payrolls declining in September, and the August figures were revised down from a modest gain of 54,000 jobs to a small loss of 3,000. While ADP and BLS numbers often diverge, if this pattern holds when the next BLS report eventually appears, it would point to a labor market beginning to feel some strain.

Why does the labor market matter so much for growth? As we’ve noted before, consumers account for roughly 70% of the U.S. economy—and they’ve carried an outsized share of that growth recently. In three recent quarters, consumer spending contributed more to GDP than overall economic growth itself, meaning that without strong consumer spending, GDP would have been much weaker. Any disruption to that engine, particularly from a softening labor market, could spell trouble for the broader economy.

Consumer sentiment, meanwhile, has been mired in pessimism since inflation reappeared in 2022. Yet despite complaining about higher prices, consumers have kept spending. Strong stock-market gains and rising home equity have boosted household wealth, creating tailwinds for spending. The labor market also provided confidence, at least until recently, when job openings far exceeded the number of unemployed workers. That gap has now closed, and the number of unemployed has overtaken total job openings for the first time in several years.

While layoffs remain relatively modest, job growth has clearly slowed. We’re no longer seeing the robust hiring of a year or two ago, and recent indicators even suggest the possibility of job declines.  That’s significant, because inflation didn’t stop consumers from spending, but the fear of job loss will.

The story of the past year has been one of remarkable consumer resilience. But resilience has its limits. If the labor market weakens further, it could finally cool the consumer engine that has kept the economy humming. The next few months will reveal whether the Fed’s anticipated rate cuts arrive in time to cushion the landing, or if consumers start to tap the brakes.

Sazerac Announces Expansion in New Albany 25 new jobs to be added and $38 million to be invested 

by with One Comment 1si News1si Press ReleaseEconomic Development

New Albany, Ind. (October 16, 2025) – Sazerac of Indiana, LLC, doing business as Northwest Ordinance Distilling, today announced plans to expand its operations in New Albany, following today’s approval of a local property tax abatement by the New Albany City Council. The project represents a capital investment of more than $38 million, including over $35 million in new equipment and over $2 million in real property improvements. 

The expansion will enable the company to increase production capacity to meet growing demand for its distilled spirits products. The project will also create 25 new full-time positions, while ensuring the continued employment of the company’s existing 357 team members in New Albany. 

“This expansion marks an exciting next step for our New Albany operation,” said Jake Wenz, CEO and President at Sazerac. “As demand for our products continues to grow, this investment will help us better serve our customers while reinforcing our commitment to the New Albany community. We’re grateful to the City of New Albany and One Southern Indiana for their ongoing partnership and support, which make growth like this possible.” 

“We’re proud of Sazerac’s continued success here in New Albany and for their confidence in our community to make these significant investments,” said Mayor Jeff Gahan. “This expansion reflects the strength of our local workforce and exemplifies the city’s ongoing commitment to supporting quality job creation.” 

Sazerac of Indiana has been operating in New Albany since 2017, when it located and revitalized the former General Mills facility on Grant Line Road. Since then, the company has achieved significant growth, made substantial capital investments, and drawn upon the strength of the local workforce while expanding its team. 

Sazerac Company, one of the nation’s oldest privately held and family-owned distillers, operates the New Albany facility—Northwest Ordinance Distilling—where it bottles a diverse range of spirits for nationwide distribution. 

“Sazerac’s continued growth in southern Indiana underscores both their confidence in this community and the region’s long-term strength as a global hub for manufacturing and logistics,” said Lance Allison, President and CEO of One Southern Indiana (1si). “We’re proud to support this expansion and the quality jobs it brings to southern Indiana.” 

Construction and equipment installation are expected to begin later this year. 

About Sazerac of Indiana, LLC / Northwest Ordinance Distilling 
Sazerac of Indiana, LLC, operating as Northwest Ordinance Distilling, is a wholly owned subsidiary of the Sazerac Company, one of the largest distillers in the United States. The New Albany facility produces a variety of distilled spirits for distribution across the U.S. and internationally. 

About One Southern Indiana 
One Southern Indiana (1si) was formed in July of 2006 as the economic development organization and chamber of commerce serving Clark and Floyd counties. 1si’s mission is to help businesses innovate and thrive in the southern Indiana / Louisville metro area via the three pillars of Business Resources, Economic Development, and Advocacy. For more information on One Southern Indiana, visit www.1si.org. 

The Economic Super Bowl Goes Dark

by with No Comment 1si NewsEconomic Development

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

The first Friday of every month is a day that economic watchers eagerly anticipate. It’s the Super Bowl of all economic indicators — the Bureau of Labor Statistics’ (BLS) Employment Situation Report. This single report tells us more about the economy’s health than any other monthly release. It reveals whether the labor market is running hot or cold, whether inflation pressures might intensify or cool, and whether the economy’s next move is up or down.

The employment report comes from two surveys. The establishment survey provides the headline jobs number — whether companies are expanding payrolls or cutting back. The household survey gives us the unemployment rate. Together, these two components form the backbone of how we understand the nation’s economic momentum.

Unfortunately, we didn’t get that crucial report last Friday because of the federal government shutdown. No jobs number. No unemployment rate. And a bit of darkness on the economic trajectory.

We do have some data released before the shutdown, along with several private-sector indicators. Collectively, they paint a mixed picture, but the weight of evidence continues to tip toward slower growth.

Let’s start with the broadest measure, Gross Domestic Product (GDP), the economy’s scorecard. The most recent report showed growth of 3.8% from the prior quarter, a figure that looks quite strong at first glance. But as is often the case, it pays to look under the hood.

During the first quarter, there was a surge in imports as manufacturers and retailers rushed to bring in goods ahead of potential tariffs. Because imports are subtracted from GDP, that surge artificially reduced GDP by 0.6%, even though the underlying economy was not actually shrinking. Pundits quickly seized on that number to fit whatever narrative they favored.

Fast-forward to the second quarter, and the pattern reversed. Imports fell sharply — the mirror image of the earlier spike — which mathematically added about five percentage points to GDP growth. That swing turned what would have been roughly –1.2% growth into a headline gain of +3.8%. In other words, much of the “strength” in that report came from the accounting effect of lower imports, not necessarily from genuine economic acceleration.

Several private indicators reinforce that slowdown narrative. The ADP National Employment Report, which tracks private-sector payrolls, showed a decline in September.

While the ADP and BLS reports often diverge month to month, the weakness in ADP’s data will likely strengthen the case for the Federal Reserve’s next rate cut.

Meanwhile, the Institute for Supply Management (ISM) released its twin surveys on manufacturing and services. The ISM Manufacturing Index remained below the critical 50 mark, signaling contraction. Manufacturers continue to struggle with higher borrowing costs and renewed supply chain uncertainty tied to tariffs. The ISM Services Index, which has been in expansion territory for nearly all of the post-COVID recovery, slipped to exactly 50, the lowest since the pandemic and below expectations. The index has been trending downward since late 2024, suggesting that service-sector growth is also losing momentum.

Taken together, these reports indicate that the economy is still expanding, but at a slower and more uneven pace.

If there’s one consistent source of strength, it’s the American consumer. Despite dour headlines and shaky confidence readings, consumer spending remains resilient. Shoppers haven’t shut their wallets, particularly at the upper end of the income scale, and that spending has been a key driver of economic growth.

Still, this resilience has limits. The one report that could quickly change sentiment is the employment report itself. A weaker labor market, fewer jobs and slower wage growth, would likely cause consumers to pull back. Without the BLS report, we’re flying partly blind. But the private-sector clues are increasingly pointing toward a softening labor market.

Even without the government’s data, the broader picture is coming into focus; an economy that is cooling, not collapsing. Manufacturing remains weak, services are slowing, and consumer spending is steady but fragile. When the next jobs report finally arrives, it will likely confirm what these early signals are already telling us. The economy is moving toward slower growth.

The Rate That Drives the Economy Isn’t Set by the Fed

by with No Comment 1si NewsEconomic Development
Submitted by Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast
 
As expected, the Federal Reserve began another rate-cutting cycle at its September meeting last week. Market participants are now pricing in two additional cuts for the remainder of 2025. As we’ve written in this space before, the Fed has begun tilting its focus toward employment concerns. While inflation remains above the 2% target, the softening labor market is now firmly on the Fed’s radar. The September cut marks the start of an effort to boost demand and support the labor market, but that will take time.

The more influential rate when it comes to driving the broader economy, and struggling sectors like manufacturing and housing, is the 10-Year Treasury yield. Long-term financing, including mortgages, is tied closely to this rate. When the 10-Year yield falls, mortgage rates follow. When it rises, so do borrowing costs.

We saw this dynamic in 2021, when the 10-Year yield dropped below 1% and mortgage rates hovered near 3%. That environment fueled a surge in home purchases and refinancing, leaving a large share of American homeowners with mortgages under 4%. That’s one reason supply in the housing market has remained tight; you’re less likely to sell and trade up or down when it means replacing a 3% mortgage with a 6% one.

So, movements in the 10-Year yield will be instrumental in determining the fate of housing and other interest-sensitive industries like manufacturing.

A key driver of the 10-Year yield is expected inflation. Bondholders want to protect their purchasing power, so when inflation expectations rise, so do interest rates. We saw this clearly in 2022 and 2023, when inflation reached 40-year highs and the 10-Year yield climbed toward 5%. Mortgage rates peaked at 7.9% in October 2023.

As inflation cooled after the Fed’s rate hikes, the 10-Year yield began to drop, ending September 2024 at 3.75%. Mortgage rates followed suit, approaching 6%. The Fed then kicked off this latest cycle with a 50-basis-point (0.5%) cut to the Fed Funds rate in September 2024. But instead of continuing to fall, the 10-Year yield climbed again, reaching 4.8% by January 2025. Mortgage rates responded, nearing 7%.

The 10-Year yield briefly dipped below 4% following the latest employment report. When the economy weakens, investors anticipate lower inflation and flock to bonds, which drives yields down. That’s exactly what began to unfold after a string of weak jobs reports in July.

But following the September rate cut, the 10-Year began rising again. If yields continue upward, mortgage rates, which were inching closer to 6%, could reverse course and rise once more.

If the job market continues to weaken, we’ll likely see the 10-Year fall further, easing mortgage rates and providing support for housing. And if the economy does soften, which still seems likely, the Fed will continue to prioritize employment over inflation. That will bring additional rate cuts and downward pressure on yields.

However, if growth surprises to the upside — or if bond investors grow more anxious about fiscal deficits and persistent inflation — we’ll see the opposite: higher yields and renewed upward pressure on mortgage rates.

The Summer Chill: Job Growth Stalls, Recession Looms

by with No Comment 1si NewsEconomic Development

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

The Summer of 2025 may go down in the economic history books as the start of the self-inflicted recession. The temperatures may have been hot, but job creation was ice cold. Over the past three months, the nation has averaged just 29,000 new jobs per month, one of the weakest three-month stretches since the Great Recession. That level of job growth is usually seen either heading into or coming out of a recession.

The chill became even more apparent with the latest Bureau of Labor Statistics report released this past Friday. Only 22,000 jobs were added in August, and the unemployment rate rose to 4.3%, the highest since 2021. While a 4.3% unemployment rate isn’t alarming in isolation, a three-month average below 30,000 jobs is a red flag, no matter how it’s spun.

The leading sector? Healthcare, which added 31,000 jobs. Some back-of-the-envelope math shows that without gains in healthcare; overall job growth would have been negative. The economy isn’t on stable footing if it’s only adding jobs in one sector.

It’s been about six months since the “Liberation Day” announcement of reciprocal tariffs. Since then, multiple versions have emerged, but signs of their impact are now showing up in employment data. Manufacturing, the intended beneficiary of tariffs, lost another 14,000 jobs in August. Wholesale trade, a sector heavily involved in domestic and international commerce, declined by 12,000 jobs.

The trend is not new. Manufacturing is down 78,000 jobs over the past year, and wholesale trade has shed 32,000 jobs since May. Wholesalers primarily sell goods to other businesses. So, a decline in this space can signal falling business-to-business demand, with ripple effects across the broader economy.

Labor market health is always important, but it’s especially critical at this point in the economic cycle. The current recovery has been driven largely by consumer spending, and consumption has been the main engine of GDP growth. In fact, over the past 3½ years, consumption’s contribution has equaled or exceeded total GDP growth in 6 quarters.

That means any pullback in consumer spending would significantly slow the economy, and what triggers that slowdown? The labor market.

That’s why Treasury bond yields fell sharply after the jobs report, with the 10-year yield seeing a significant drop. Investors are now pricing in a near-certain September rate cut, with momentum building for two additional cuts before year’s end. In an Eye of the Economy earlier this year, we anticipated three cuts and a pivot by the Fed toward employment concerns over inflation. We may be seeing that shift play out.

If the next CPI report comes in cooler than expected, we could even see a 0.5% rate cut in September.  A hot CPI will produce a significant down day in the equity markets.

Falling job creation and a rising unemployment rate will rattle consumer confidence. That hesitancy can stall spending and slow the economy. Back in our Mid-Year Outlook this past May, we projected slower growth for the remainder of 2025, but didn’t anticipate a recession. That forecast is now in question.

If job creation remains weak, job openings continue to shrink, and sectors like manufacturing stay soft, we may indeed be headed for a downturn. But there is a silver lining: a softening economy could bring falling interest rates and lower mortgage rates, a much-needed lifeline for the housing sector.

Indiana’s Economy and the Manufacturing Cycle

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

Indiana’s economic health continues to move in tandem with national manufacturing trends. As one of the top five states for manufacturing job concentration, Indiana gains when manufacturing booms — and feels the sting when it stalls. Today, high interest rates and inflation pressures are weighing on durable goods output, leading to a slowdown in manufacturing activity. With payrolls shrinking across the U.S. and right here in Indiana, and key indicators such as the ISM Index and industrial production flashing caution, the Federal Reserve’s expected rate cuts can’t come soon enough for this vital sector.

Because of this close connection, national manufacturing performance directly influences job creation in Indiana. When national manufacturing is on the upswing, so are jobs here. And when manufacturing slows, the impact is felt with a reduction in jobs added.

One persistent drag on manufacturing over the past two years has been the higher interest rate environment — prompted by elevated post-pandemic inflation and a Federal Reserve that responded late. Longer-lasting manufactured durable goods are interest rate sensitive, and higher rates curb production, while lower rates provide a boost. The sector should receive a lift due to a September interest rate cut now more likely.

The national manufacturing slowdown shows up in different indicators. For example, since October 2022, the ISM Manufacturing Index has indicated contraction — hovering below the 50 threshold with a brief exception in February this year. That makes it nearly three years (excluding February) of sub-50 readings, the longest stretch since the early 1990s — around the time of the 1990 recession. The downturn during the Great Recession and the sharp fall during the COVID shutdown were notable but relatively brief. The New Orders component of the index has been declining since January 2025.

Industrial production tells a similar story. Year-on-year growth has trended downward since October 2022, and has generally hovered near or below zero since late 2023 — a meaningful warning sign given that recessions often follow when industrial production slips into negative territory. Although, historically, there are rare exceptions (e.g., 2015, 1956, 1952) where production dipped without triggering a recession, those are the exception — not the rule.

The national manufacturing slowdown is mirrored in regional payroll data. U.S. manufacturing job growth has been negative year-over-year since October 2023. In Louisville Metro, manufacturing payrolls have declined since early 2024; statewide, Indiana’s manufacturing payrolls have been declining since early 2023.

On the inflation front, recently released Consumer Price Index (CPI) and Producer Price Index (PPI) came in on the hot side, with core rates showing significant increases from the prior month. Core rates (inflation minus food and energy) for both CPI and PPI exceed 3%.

Despite elevated inflation, labor market concerns are likely to gain more attention over the next several months, prompting a September cut by the Fed and likely two additional cuts the rest of the year. As we look ahead, interest rate cuts could offer needed momentum.

Beneath the Headlines: A Softer U.S. Economy Emerges

by with No Comment 1si NewsEconomic Development

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

The Super Bowl of economic indicators – the national jobs report – came out last week, and it was hard to find much to cheer about.

Over the past three months, U.S. payroll growth has averaged just 35,000 jobs per month. That average includes the 73,000 jobs added in July, but even this figure may be revised lower, as May and June saw steep downward revisions totaling more than 250,000 jobs. Excluding the losses during the COVID recession, we have to go back to the Great Recession (2007–2009) to find job growth as weak.

Following the latest employment report, expectations for a Fed rate cut in September surged. Markets are now pricing in three cuts before year’s end — September, October, and December. As noted previously, the Fed should have cut in July. Two Fed Governors, Waller and Bowman, dissented at that meeting, but the majority kept rates unchanged.

The household survey, which gives us labor force data, offered no relief. It showed employment down by 260,000 and the number of unemployed up by 221,000. The unemployment rate ticked up from 4.1% to 4.2%, and the labor force participation rate slipped from 62.2% to 62.1%. That decline is the opposite of what’s needed to expand the supply side of the economy — a key part of the administration’s growth strategy, especially to offset the drag from higher tariffs.

The promised boost to manufacturing from the highest tariffs in decades hasn’t appeared in the data. In fact, the numbers suggest the opposite. Manufacturing payrolls fell by 11,000 in July, the third straight monthly decline. Since February, the number of unemployed in manufacturing has climbed from 459,000 to 641,000. Year-over-year manufacturing job growth has been negative since October 2023, and the pace of decline has accelerated this year. This will have implications for Indiana and Kentucky.

The ISM Manufacturing Index, considered to be soft data based on a survey, fell to 48.0 in July, below the expected 49.5 and marking the fifth consecutive month in contraction territory. An ISM reading below 50 signals contraction; above 50 signals expansion. The index briefly topped 50 in January and February — the first time since 2022 — but has been stuck in contraction since. New orders, a component of the overall index, have shown some recovery since March but remain below 50. The latest factory orders report showed a decline of nearly 5% last month.

At first glance, the latest GDP report seems like a bright spot, with Q2 growth at 3.0%. But looking under the hood reveals a different story. Most of the gain came from a sharp drop in imports, which mechanically boosts GDP. This followed a Q1 surge in imports as businesses tried to get ahead of new tariffs. Real final sales to domestic purchasers — a better measure of consumer and business demand — rose just 1.2%, down from 1.9% in Q1 and the weakest since late 2022.

As I’ve written before, the outlook comes down to the consumer and the labor market. Right now, neither is strengthening. The U.S. remains a service-driven economy, but service sector growth is showing signs of slowing as well. While inflation remains on their radar, weaker growth will likely take priority, and softer price increases will follow. The September cut seems all but certain — the question is whether it will be soon enough to avoid a recession.

No July Surprise: Inflation and Resilience Will Keep the Fed on Hold

by with No Comment Economic Development

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

A few weeks ago, we noted there was an outside chance of a surprise rate cut in July. A softening labor market and early signs of consumer fatigue created a plausible case for such a move. Even Fed Governors like Christopher Waller publicly acknowledged the justification for a cut. If the Fed wanted to ease, the data offered a reasonable foundation.

But a rate cut isn’t coming in July—because it all comes down to inflation.

Yes, inflation has come down, but not far enough. The latest Consumer Price Index (CPI) showed the core inflation rate (which excludes food and energy) ticking up by 0.1 percentage points to 2.9%. While this was slightly better than expected, the monthly increase accelerated from 0.1% to 0.2%.

At first glance, headline inflation appears to be under control, which might suggest room for a Fed cut. But looking beneath the surface tells a different story.

Take a sampling of goods that rely on imports: prices are beginning to climb meaningfully. Appliance prices rose 1.9% in a single month—equivalent to more than 24% annually. Apparel prices overall were up at a 5% annual rate, but subcategories saw steeper increases. Men’s shirts and sweaters jumped 4.3% in just one month, and women’s dresses experienced a similar spike. Audio and video equipment rose 1.1% monthly, or more than 13% on an annual basis. “Other linens” surged 5.5% monthly, a pace exceeding 30% annually. These price pressures—especially in goods typically sourced through imports—are sending warning signals. So, while a case could be made for a Fed rate cut, July is off the table.

What is keeping headline inflation modest? Energy. A large reduction in energy prices is doing the heavy lifting. Energy commodities, including gasoline and fuel oil, dropped nearly 8% on an annual basis. Excluding energy, the headline inflation rate runs below 2.5%.

Meanwhile, the broader economy continues to show resilience. Despite headwinds, retail sales rebounded in May with a 0.6% increase—triple the expected gain of 0.2%. When excluding gasoline stations, sales climbed 0.7%. While there are weak spots, this data doesn’t point to a consumer collapse that would justify a rate cut.

On the labor front, we’re not witnessing a breakdown. Job openings remain roughly balanced with the number of unemployed, indicating a stabilizing labor market. While job growth has moderated compared to last year, it hasn’t contracted. Private payrolls were soft in the last report, but job gains were impressive after adding government payrolls. Manufacturing remains a weak spot, even with the aid of tariffs.

The more concerning labor market indicator is with unemployment claims. New claims remain historically low—well below levels associated with recessions. However, continuing claims are steadily rising and have not reversed since their low point in mid-2022. This suggests that while employers are slow to lay off workers, employment may be more difficult for those who lose their jobs.

In our last Eye on the Economy, we discussed emerging weaknesses beneath the surface of a record-breaking stock market. The warning signs are still present. But for now, the economy continues to chug along—just enough to escape a July rate cut from the Federal Reserve.

Economic Update | Markets Are Up, But Is the Economy?

by with No Comment 1si NewsEconomic Development

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

Back in July 2000, the S&P 500 reached what was then an all-time high. Less than a year later, the economy slipped into a mild recession. While the downturn wasn’t severe, it took nearly seven years for the S&P 500 to recover. The NASDAQ took even longer—almost 15 years—to regain the ground lost during what became known as the “dotcom” recession.

Then, in late 2007, the S&P 500 again hit a peak—just before the Great Recession, the most significant economic contraction since the Great Depression. During the 2010s, markets steadily climbed with periodic corrections. In February 2020, the S&P was once again at record highs, before the COVID-19 shock led to one of the sharpest recessions in history. Thanks to extraordinary federal stimulus and Federal Reserve intervention, markets quickly rebounded and resumed their upward trajectory.

Fast forward to 2025, and the market is again at an all-time high—this time following a sharp pullback associated with “Liberation Day” and the announcement of sweeping tariffs. After several delays, the past week saw a wave of tariff reinstatements on several key trading partners at levels few anticipated.

While markets may be surging, that shouldn’t be mistaken for economic strength. History shows that market peaks have often preceded downturns. In 2001 and 2007, economic weakness followed record highs.  Are we on the verge of repeating 2001 and 2007?

At this year’s Mid-Year Outlook, I projected that the economy would avoid a full recession but likely experience a slowdown. With the latest trade developments, the possibility of a more significant deceleration will grow.

The most recent employment report showed stronger-than-expected job growth—147,000 new jobs—but a closer look reveals that nearly half of those were in state and local government. Private sector growth was a modest 74,000 jobs, well below the expected 120,000. Manufacturing, one of the intended beneficiaries of tariffs, lost another 7,000 jobs.

Meanwhile, continuing unemployment claims are gradually rising, suggesting that displaced workers are taking longer to find new employment. In June, average weekly hours declined, along with average hourly earnings—indicators of a softening labor market.

On the consumer front, spending on both goods and services declined. Foot traffic, while not necessarily the same as sales data, offers more timely insight. Across Louisville Metro, restaurant visits are down 15% from last year. Bars, furniture stores, and department stores also saw declines, though home improvement shows a slight increase.

Are these local trends early signs of a broader national pullback in consumer spending? Time will tell.  Tariff uncertainty, and market volatility are not the conditions businesses need to make long-term investments. The cracks in both consumer and labor markets could open wider.