What Indiana’s Fastest-Growing Counties Have in Common

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

One of the simplest measures of whether a community is succeeding is whether people choose to live there. Population growth reflects thousands of individual decisions about where families want to build their lives and where businesses see opportunity. Although no single statistic tells the entire story of a local economy, population growth often captures the cumulative effect of many factors that make a community attractive. This week, we compare Indiana’s twenty fastest-growing counties over the past five years with its twenty slowest-growing counties to see how they differ across several important economic indicators. Clark and Floyd Counties are among the fastest-growing counties in the state, and both appear in the fastest-growing group.

One of the primary benefits of population growth is a growing labor force. Businesses can only expand if workers are available, and regions can only attract new employers if they can meet workforce needs. Not surprisingly, we see stark differences between the fastest and slowest-growing counties in both job growth and business formation.

In the twenty slowest-growing counties, employment increased by just over 8,000 jobs, representing a 4% increase over the five-year period. The number of business establishments grew by only 334, or 3%. Average weekly wages increased by more than $163, an 18% gain.

By comparison, the twenty fastest-growing counties added more than 173,000 jobs, a 9% increase. Not a big surprise because the fastest growing counties in Indiana are also the largest, but the growth on a percentage basis is more than double. The number of establishments expanded by 13,237, representing a 14% increase. Average weekly wages rose by $196, also an 18% increase.

One factor behind stronger population growth is in-migration. The twenty fastest-growing counties gained more than 18,000 residents through domestic migration over the five-year period, while the twenty slowest-growing counties barely surpassed 1,000. Much of that migration occurred in the years immediately following COVID, when remote and flexible work arrangements allowed more people to relocate. The source of that migration is also revealing. Cook County, Illinois, was the largest contributor of new residents to the fastest-growing counties. For the slowest-growing counties, Marion County was the largest feeder, followed by Daviess County, likely reflecting moves to neighboring counties.

Educational attainment also differs substantially between the two groups. In the fastest-growing counties, bachelor’s and graduate degree attainment exceed the Indiana average and closely mirror national averages. In the slowest-growing counties, both measures fall below state and national averages.

The industrial composition of these counties also tells an interesting story. The slowest-growing counties are less economically diversified, with just three industries accounting for 46% of total employment. In the fastest-growing counties, the top three industries account for only 38% of total employment, reflecting a broader mix of economic activity.

Manufacturing remains the largest industry in the slowest-growing counties, but average annual wages are approximately $28,000 lower than manufacturing wages in the fastest-growing counties, perhaps reflecting differences in educational attainment, technology adoption, and productivity. Healthcare is the largest industry in the fastest-growing counties, where average annual wages exceed those in the slowest-growing counties by nearly $16,000.

The differences become even more pronounced in knowledge-based industries such as professional and business services, finance and insurance, and information. Together, these sectors account for 16.4% of employment in the fastest-growing counties compared to just 8.9% in the slowest-growing counties. Salaries in these industries are also substantially higher, ranging from 21% to 47% above those found in the slowest-growing counties.

The counties experiencing the strongest growth have built more diversified economies, attracted higher-skilled workers, and generated stronger business formation and higher wages. While every community has unique strengths and challenges, the data suggest that long-term prosperity depends on more than recruiting a single employer or industry. It requires building places that offer economic opportunity, quality jobs, educational attainment, and a quality of life that attracts and retains talent.

The lesson is clear: communities that invest in talent, economic diversification, and quality of place are also the communities that are best positioned for sustained population and economic growth. For areas that resist or combat population growth, in whatever form that might take, the result could be the opposite.

Labor Force May Be One of the National Economy’s Biggest Challenges

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

The first half of 2026 marked a noticeable improvement from the weak hiring that characterized much of last year. Throughout 2025, the national economy averaged fewer than 10,000 payroll jobs per month, making it one of the weakest years for job growth in more than two decades outside of an officially declared recession. This year, however, monthly payroll gains consistently exceeded 100,000 jobs.

That changed with the June employment report.

The June payroll release showed the U.S. economy added just 57,000 jobs, well below market expectations. Nearly all of the gains came from healthcare and education, which added 69,000 jobs. Private sector payrolls increased by only 49,000 jobs, underscoring the weakness in hiring across much of the economy.

Financial markets responded quickly. Government bond yields declined, and investors reduced the probability of additional Federal Reserve interest rate increases. If next month’s report shows similar weakness, expectations could begin shifting toward another Fed rate cut later this year.

The more concerning news, however, came from the household component of the survey.

The nation’s labor force fell by 720,000 workers, causing the labor force participation rate to decline from 61.8 percent to 61.5 percent. This was not simply a one-month anomaly. Since December 2025, the U.S. labor force has declined by approximately two million workers.

A shrinking labor force creates a significant headwind for future job growth. Businesses cannot hire workers who are not participating in the labor market. This occurred throughout 2025 with the slowdown in the labor force coinciding with weaker payroll growth. While the number of employed workers fell by more than 500,000 in June, the unemployment rate nevertheless declined one tenth of a percentage point to 4.2 percent because fewer people were actively participating in the labor force.

The picture is somewhat different here at home.

Unlike the national economy, the region’s labor force has begun to improve. After remaining essentially flat throughout 2025, labor force participation has strengthened during 2026, providing a positive signal for the regional economy. Employment has also increased compared with early 2025, helping reduce the unemployment rate from 3.9 percent in January 2025 to 3.2 percent in January 2026. The region continues to see strong in-migration numbers, resulting in a growing labor force.

Indiana as a whole tells a similar story. The state’s labor force has grown modestly over the past year, while employment growth has outpaced labor force growth. As a result, Indiana’s unemployment rate declined from 3.7 percent to 3.3 percent.

Looking ahead, labor force availability may become one of the most important factors determining the success of the nation’s reshoring efforts. Manufacturers cannot expand production without an adequate supply of workers. At the same time, I suspect much of the next wave of reshoring, if any, will rely less on adding workers and more on investments in robotics and automation. In many cases, manufacturers will resort to using capital over labor.

That should not necessarily be viewed as bad news. Greater automation increases productivity, improves profitability, and helps domestic manufacturers remain globally competitive. In an era of slower labor force growth and an aging workforce, higher productivity may prove to be the key that allows American manufacturing to continue expanding despite a more limited supply of workers.

From Manufacturing to Healthcare to Meta

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

Twenty years ago, Facebook was little more than a social networking site for college students. Today, the company, now known as Meta, is one of the world’s largest technology firms, a major player in artificial intelligence, and is building a data center right here in Southern Indiana.

Thinking about Meta and other AI companies such as OpenAI and Anthropic got me reflecting on just how much the Southern Indiana economy has changed over the past two decades. Twenty years ago, Southern Indiana’s corporate landscape looked very different. Names such as Pillsbury, Key Communications, Colgate, Hitachi and Jeffboat were prominent employers. Manufacturing was the region’s largest sector, representing roughly 20 percent of all jobs and exceeding healthcare employment by nearly 8,000!

Back in 2005, the average weekly wage in Southern Indiana (Clark, Floyd, Harrison, Scott, and Washington) was $601. Today, based on the fourth quarter of 2025, that figure stands at $1,106, an increase of 84 percent. That’s an average annual wage growth of 3.1 percent. Over the same period, inflation averaged approximately 2.5 percent per year.

In other words, wages in Southern Indiana have generally grown faster than the cost of living, resulting in meaningful gains in purchasing power and quality of life for many workers. The question is why. To answer it, we need to examine which industries grew, which declined, and how wages changed across sectors.

The largest increases in absolute average weekly wages occurred in finance and insurance, where wages grew at an annual rate of 3.5 percent, and real estate, where wages grew at an annual rate of 5.5 percent. While not every occupation in these sectors requires a college degree, many are knowledge intensive jobs that depend on specialized skills and professional expertise. Wage growth was impressive, although employment growth was relatively modest, with the sectors adding approximately 450 jobs over the twenty-year period.

Healthcare and social services, which include ambulatory health care, hospitals, nursing and residential care facilities, and social assistance, was the leading growth sector, adding approximately 8,000 jobs. This is as many as manufacturing, retail trade, transportation and warehousing, and accommodation and food services combined. Wage growth of 2.4 percent trailed both inflation and the regional average. Today, healthcare and social services have surpassed manufacturing as the region’s largest sector, employing roughly 2,000 more workers.

Transportation and warehousing, a cornerstone of the Southern Indiana and Greater Louisville economy, posted the second largest gain in employment, adding approximately 6,000 jobs. Average weekly wages increased by $441 during the period, translating into annual wage growth of 2.4 percent, slightly below the average rate of inflation.

Wholesale trade, another logistics related sector, also performed well. It added more than 1,100 jobs while recording annual wage growth of 3.7 percent, comfortably exceeding inflation.

One of the strongest performers was professional, scientific, and technical services. This knowledge-based sector includes engineers, consultants, computer professionals, architects, and other highly skilled occupations. Average weekly wages increased by $752, while employment grew by nearly 1,700 jobs. Annual wage growth averaged 3.5 percent, outpacing inflation by a full percentage point. Few sectors combined strong job growth and strong wage growth as effectively.

Turning to the production sectors, both construction and manufacturing experienced solid wage gains. Construction wages grew at an annual rate of 3.8 percent, while manufacturing wages increased by 3.4 percent annually. Construction added 544 jobs despite the severe impact of the housing collapse during the Great Recession.

Manufacturing presents a more nuanced picture. While the sector lost approximately 2,000 jobs over the twenty-year period, total wages paid in the sector increased by 76 percent and average weekly wages nearly doubled. This pattern is consistent with productivity gains that allow manufacturers to produce more output with fewer workers.

Another notable source of job growth was accommodation and food services. The explosion of restaurants, entertainment venues, and lodging options throughout Southern Indiana is evident in the data. The sector added nearly 4,000 jobs and posted annual wage growth of 3.9 percent. Although average wages remain well below the regional average, workers in the industry nevertheless experienced meaningful wage gains over time.

The strongest combination of wage growth and employment growth occurred in finance and insurance, real estate, professional and technical services, and wholesale trade. Some of these sectors tend to be knowledge intensive and skill driven, reflecting broader changes in the regional economy. The two industries that generated the most jobs, healthcare and social services and transportation and warehousing, saw wage growth that lagged both inflation and the regional average.

The Southern Indiana economy of 2026 is not the Southern Indiana economy of 2005. While manufacturing and logistics remain important pillars, the region has steadily added more knowledge based and professional occupations. Healthcare has replaced manufacturing as the region’s largest employment sector.

The arrival of companies such as Meta and the growth of artificial intelligence are reminders that economic change never stops. The jobs of the future may look very different from the jobs of the past, but the data suggest that regions able to attract and grow higher skilled industries are also the regions most likely to see rising wages and improving living standards.

As we look ahead, digital infrastructure will become increasingly important to economic competitiveness. Data centers are emerging as the highways, railroads, and industrial parks of the AI economy, providing the computing power needed to support the next generation of businesses and innovations. Regions with robust digital infrastructure, reliable power, and access to advanced computing resources will be better positioned to attract investment, support entrepreneurship, and compete for the jobs of the future.

Just as access to rivers, railroads, and interstate highways helped shape the Southern Indiana economy of the past, access to digital infrastructure may help shape the Southern Indiana economy of the future.

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

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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.

Changing Drivers of Growth in the U.S. Economy

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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

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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.

A Strong Jobs Report—With Some Important Caveats

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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.

A Cooling Labor Market Meets Regional Variation

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

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.

How the Leisure and Hospitality Sector Rebounded – and What Comes Next – With Continued Growth in Floyd and Clark

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

Covid dealt a significant blow to the leisure and hospitality industry. Shutdowns, followed by various mandates and crowd restrictions, caused a sharp drop in employment across the sector.

In Louisville Metro, leisure and hospitality employment fell from roughly 69,000 workers to just 37,000 over the course of only a couple of months. Floyd and Clark County accommodation and food services employment dropped by a couple thousand.

As the economy gradually reopened, foot traffic returned. But restaurants and other establishments faced a new challenge: staffing. Businesses had customers willing to spend money, but they could not find enough workers to meet the demand. You might remember walking into a restaurant during that period and being told there was an hour wait, even though half the tables were empty. That wasn’t a demand problem. It was a staffing problem.

Households found extra cash following several rounds of government stimulus. This supported strong consumer spending on goods such as recreation equipment, camping and sporting goods, and home improvement items, anything that allowed people to spend time outdoors. RVs, for example, were selling like hotcakes.

After buying enough “stuff,” and as the economy continued to reopen, households began shifting their spending toward experiences, such as restaurants, concerts, and travel.

Growth in leisure and hospitality establishments continued as this experience-based economy gained momentum. By June 2024, employment in the Louisville Metro leisure and hospitality sector reached an all-time high, surpassing the pre-Covid peak by about 2,000 workers. The sector is highly seasonal, typically reaching its peak employment in June, and the June 2024 figure marked the highest level on record. In Floyd and Clark counties, employment in accommodation and food services reached a peak in the 2nd quarter of 2025, increasing by about 3% since pre-Covid, with 34 additional establishments.

Coming out of Covid, the sector faced several challenges, including staffing shortages and supply chain disruptions that made it difficult to obtain provisions and other inputs. Remember when it was tough to find chicken wings! At the same time, additional headwinds were developing.

Inflation reached a peak of roughly 9 percent in mid-2022, following the Federal Reserve rate hiking cycle that began in March 2022. Higher prices and rising wages have hit the restaurant industry particularly hard, and many establishments are still dealing with these pressures today.

Consider a few numbers that illustrate the challenges faced by the leisure and hospitality sector, which is dominated by restaurants and food services.

Since February 2020, the Consumer Price Index measure for Food Away From Home, the prices consumers pay when eating outside the home, has increased by about 35 percent.

Two of the largest costs faced by restaurants have also risen substantially. The Producer Price Index for All Foods, which reflects the prices paid by restaurants and food service establishments for food inputs, has increased about 31 percent since February 2020.

At first glance, that might appear manageable. Menu prices have increased by 35 percent while food costs have risen by 31 percent, suggesting slightly wider margins.

But labor costs tell a different story.

Average hourly wages in the leisure and hospitality sector have increased by a staggering 38 percent since early 2020. The combined rise in food costs and labor costs underscores the challenges that many restaurants and hospitality businesses face today. In Floyd and Clark County, for example, average weekly wages have gone from approximately $322 pre-Covid to $449 most recently, about a 39% increase.

After reaching a peak in June 2024, leisure and hospitality employment in Louisville Metro declined by roughly 3,500 jobs during 2025. This could reflect a combination of business closures, or establishments finding ways to reduce costs, perhaps by substituting technology or capital for labor in some cases. Floyd and Clark have bucked this trend, with recent data showing continued employment gains for 2025.

Leisure and hospitality was one of the largest contributors to job growth in the years immediately following Covid. The Louisville Metro decline observed during 2025 also coincides with a period of nearly flat overall employment growth across the metro region.

Restaurants and food service establishments are often one of the first places where shifts in consumer behavior show up. When households begin to feel pressure from higher prices, interest rates, or a softer labor market, dining out is one of the first expenses that tends to be scaled back. For that reason, trends in the leisure and hospitality sector can often provide an early signal of where the broader economy may be headed next. In Floyd and Clark, the trend has been mostly positive.

Growth, Revisions, and the Impact of Trade Policy

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Submitted by Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast
 
Revisions to national payrolls wiped out a significant portion of previously reported job gains between April 2024 and March 2025. As a result, employment growth over that period was revised downward by 898,000 jobs.
 
We also saw weaker-than-previously reported payroll growth for 2025 itself, a year that included the economic effects of the so-called Liberation Day tariff announcements. Payrolls increased by only 180,000 during 2025, down sharply from the previously reported 584,000.

On a monthly basis, that translates to an average gain of just 15,000 jobs per month, one of the weakest non-recessionary performances going back to 2003.

Back in 2022, many economists, including this one, predicted that 2023 would bring about a recession. That forecast was driven largely by signals from financial markets, particularly the yield curve, the relationship between short- and long-term bond yields. When the yield curve inverts, meaning short-term rates rise above long-term rates, a recession has historically followed about a year later.

The recession never officially materialized. But with the benefit of revised data, we now know that job growth throughout 2024 and into 2025 was far weaker than originally believed. In hindsight, the economy may not have been as strong as headline numbers suggested.

We entered 2025 with elevated uncertainty surrounding trade policy. Then came Liberation Day on April 2nd, and uncertainty intensified. Equity markets experienced significant volatility, and capital allocation decisions became more reactive than strategic, sometimes shaped more by social media posts than by long-term planning.

What was the ultimate impact of this uncertainty on economic growth? The quarterly data provide some clues.

First-quarter GDP contracted sharply. Much of the decline was due to a surge in imports. Retailers, manufacturers, and even consumers rushed to purchase goods ahead of tariff implementation. Because imports subtract from GDP in the national accounting framework, that surge pulled overall growth lower. At the same time, data center investment was unusually strong, providing an offsetting but concentrated boost.

In the second quarter, GDP rebounded as imports normalized. Trade once again played an outsized role, contributing significantly to 3.8% growth. Much of that rebound reflected a reversal of the earlier import spike rather than broad-based acceleration.

By the third quarter, growth strengthened further, driven primarily by consumer spending, particularly services, along with continued improvement in net exports.

Advance estimates for the fourth quarter show growth slowing to 1.4%. Once again, the consumer carried much of the expansion, largely through services spending, while goods spending softened. The government shutdown erased nearly as much activity as the economy generated during the quarter, dampening overall momentum.

Tariffs were intended to boost domestic manufacturing and reduce the nation’s trade deficit. Nearly one year after the announcements, the trade deficit widened in the most recent quarter and now sits roughly where it stood prior to the first-quarter import surge. In fact, the deficit exceeds levels seen in 2023 and is comparable to 2024 levels.

On the manufacturing front, some early green shoots are emerging after several years of sluggish performance. However, tariffs have not been kind to Indiana. Manufacturing employment in the state has declined since the April Liberation Day announcement.

Total employment in Indiana has increased by only about 2,000 jobs since April. Remove the gain of approximately 14,000 jobs in education and health services, primarily health care, and overall employment would show a clear decline.

For Indiana, tariffs have been more headwind than tailwind.

With the recent Supreme Court reversal and the potential reduction or elimination of certain tariffs, manufacturing may see improved conditions heading into 2026. A more stable trade environment could provide a meaningful lift for Indiana, across rural counties and metropolitan regions alike.