A Weak Start to 2026, but Signs of Improvement Ahead

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

As we enter the fourth quarter of 2026, the year is shaping up to be one of the weakest for payroll growth, nationally, in the past 20 years, not counting recessionary-related years. However, the first quarter of this year looks like it may have been a trough in this rough patch. Since then, year-over-year changes in quarterly averages have been on a slightly upward trajectory, but still under growth from prior years.

There are several factors that might explain the weaker job growth, but one could be the degree of uncertainty in the economy. One measure of uncertainty, the Economic Policy Uncertainty Index, spiked in early 2025 and has remained elevated since. Uncertainty introduces risk into the investment equation, potentially curbing the business appetite for more investment. At least for investment in structures, much of the growth has been driven by data centers. According to data from BofA Global Research, if you remove the impact of data centers, investment in structures would be just about flat, at least from 2020 through 2025.

The national slowdown in payroll growth also showed up in Southern Indiana, where the latest employment numbers pointed to similar weakness. First-quarter data for Southern Indiana (Clark, Floyd, Harrison, Scott and Washington) are now available, and we can also take a longer view at first-quarter performance over the past 20 years. It turns out that the first quarter for Southern Indiana was also among the weakest first quarters in the past 20 years, outside recessionary-related years.

For the first quarter of 2026, Southern Indiana gained 700 jobs, representing a 0.65% change from the prior year. In the first quarter of 2025, the region added more than 900 jobs, or a 0.88% change. There were two other first quarters when job growth was weaker than in the first quarter of 2026, and those were 2017 and 2018.

The region had four consecutive first quarters of negative growth from 2009 to 2012. This was during the Great Recession, which ended in 2009, and the fallout after the recession, as the economy took several years to regain payrolls lost in the greatest contraction of the economy since the Great Depression.

The strongest first quarters came in 2015 and 2016, with growth exceeding 3%. On an absolute basis, the region gained almost 4,000 jobs over the year during the first quarter of 2016, the highest in the 20-year period. The second leading first quarter was in 2022, adding more than 3,000 jobs. We were still seeing recovery from Covid, and this level was partially influenced by a lower base in 2021.

Dragging down the first-quarter numbers for this year was manufacturing, losing 594 jobs from the previous year. For five of the past seven quarters, manufacturers have shed jobs, down about 3,000 since 2020. Healthcare continued adding jobs, gaining more than 600, almost equaling the total added for the entire region. Since 2020, health care has added almost 4,000 jobs.

The second largest increase was in professional, scientific, and technical services, adding almost 400 knowledge-based jobs, a positive sign for the overall region.

Since the first quarter, national payrolls have picked up, although still quite volatile from month to month. It is likely that the 700 jobs gained during the first quarter represent the near-term trough for Southern Indiana, and we’ll see stronger growth for the rest of the year once the data are released.

Investment, Productivity, and the Changing Jobs Picture

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

The Federal Reserve increased the Fed Funds rate by a quarter point last week. Markets had fully anticipated the increase, and the Fed delivered. Markets surged a day after the increase, showing approval of the Fed’s commitment to fighting inflation.

Eye on the Economy surely thought the Fed would hold in September, for several reasons. The core rate of inflation is not out of control, with a gradual downward trend. The labor market had a good report last month, but prior to that, payroll growth had been soft. And despite above target headline inflation, long run inflation expectations are largely anchored. Implied inflation five years out is just above 2%. We also expected a resolution to the Iran War by this time, with oil declining along with it. We were certainly not anticipating diesel at $6.50 a gallon, the price last week.

The increase in the Fed Funds rate is secondary to what is happening with longer rates. The 10-year Treasury yield surpassed the 5% threshold and now may remain around or above 5% until we see further progress on energy prices and inflation. The last time the 10-year yield was this high was 2007, just before the start of the Great Recession. A 5% Treasury yield is certainly not what the Treasury Secretary had in mind, promising stronger growth, but a federal deficit moving toward 3% of GDP. Growth in the supply side of the economy was going to reduce inflation, therefore putting downward pressure on the 10-year yield, while stronger GDP growth would help bring the deficit down as a percent of GDP. Tariffs, the Iran War and deficits and debt have interfered with those projections.

The implications of a 5% Treasury yield are far reaching, but perhaps the biggest is the impact on interest rates for consumers and businesses. Mortgage rates have gone up and are now over 7%. This will not bring any help to the ailing housing sector. Higher mortgage rates will impact the supply of new homes, putting further pressure on home prices, but also curtail demand for home sales. Significant price erosions are not likely. And higher rates will also impact mortgage payments, adding to the affordability problem. A 5% return might also be tempting to investors, adding volatility to the stock market, as investors move from stocks to bonds.

The 5% yield is not just an inflation and oil price story. Growth is also contributing to higher rates. The 10-year rate surged last week as economic indicators pointed to strong growth in both the services and manufacturing sides of the economy. The GDPNow tracker of the Atlanta Fed has GDP growing at 5%. And last week, retail sales came in much more strongly than expected.

Across Louisville Metro, similar to the U.S. picture, there is a disconnect between growth in the economy and payrolls. To be sure, Eye on the Economy was expecting faster growth in payrolls by this time of the year, but so far, it has been largely muted. Growth in manufacturing, which is happening, was expected to boost regional payrolls. However, that has yet to occur. Louisville payrolls peaked in mid-2024 at approximately 719,000 but have been moving sideways since. Most recent data have Louisville area jobs at about 710,000. These estimates are subject to measurement errors too.

But “help” was on the way for manufacturing by way of tariffs. Louisville area manufacturing payrolls peaked back in late 2022. Tariffs were supposed to resurrect manufacturing, and more importantly, add “lots of jobs”. While there is now growth in manufacturing nationally, jobs are not necessarily following. Since Liberation Day in early 2025, regional manufacturing payrolls have been largely negative, with the region losing manufacturing jobs since. One of the reasons is the uncertainty around tariffs, and spats with our neighbor to the North do not help.

But another reason is the separation of manufacturing jobs and investment in capital goods. Normally, when manufacturers invest in capital goods, like big equipment used for production, employment follows. This makes sense. As manufacturers buy more equipment for expansion, they need more workers to operate the equipment.

Since the latter part of 2023, this relationship has been moving in separate directions. Manufacturers are investing in capital goods, but the jobs are not following. In fact, the jobs are moving in the opposite direction. One conclusion is that businesses are investing in equipment to increase productivity, but don’t need the people due to advances in technology and automation. That is, we can produce more, but with fewer people.

Productivity is positive for the economy and the companies achieving those productivity gains, and this is where education and skills become increasingly important. Quite simply, as companies strive for productivity gains, employees need the skills and knowledge to compete in a more automated and fast-arriving artificial intelligence environment.

The Fed Gets a One-Two Punch from Jobs and Inflation

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

 

There was a big surprise in the national jobs picture last week. The Bureau of Labor Statistics released the monthly Super Bowl of economic indicators, the monthly jobs report, and the economy added 162,000 jobs in August. This was significantly higher than expectations and a definite improvement from the prior month’s 21,000. Manufacturing payrolls showed continued acceleration, adding 16,000 jobs. Construction added another 22,000 jobs, likely helped by the expansion of construction associated with data centers. The largest increase came in food services and drinking places, reversing the negative change of the previous month. Health care and social assistance continued to add jobs. Revisions also showed that June and July payrolls were 55,000 higher.

While the establishment survey component of the report was quite favorable, the household side was even more so. Reversing prior months’ declines, the labor force expanded by 683,000. And many of those entrants to the labor market found jobs, with employment increasing by 569,000. Over the year, both the labor force and employment had been showing weakness. So, the big increase in both was welcome news. More impressive, the labor force participation rate increased by 2/10ths of a point, moving upward from 61.4% to 61.6%.

While the unemployment rate remained flat at 4.1%, there were some noticeable changes in the breakdown by educational attainment. The largest increase was in the high school graduate category, with the unemployment rate increasing from 4% to 4.7%, above the national average of 4.1%. Unemployment among bachelor’s degree holders remained flat at 2.7%. This is not a new development. The unemployment rate for bachelor’s degree holders is consistently about two percentage points lower than for high school graduates, despite all the hoopla about the relevance of a college degree today.

The strong payrolls report became a factor in the upcoming Fed decision. While it was not the ultimate tipping point for a Fed increase, the CPI report released last Friday may have been. Inflation came in hot, with the headline CPI increasing by 4/10ths of a percent in one month. Energy prices, linked to the ongoing Iran War, were a major contributor to the increase. This kept the annual rate of inflation at 3.4%. There was a sliver of good news, and that was with the core rate, which is CPI minus the cost of food and energy. The core continued to decline on a year-over-year basis, moving to 2.4%, closer to the preferred rate of 2%.

The end result is that the Fed will now more than likely increase rates at its next meeting. As happened with the release of the CPI, the equity markets might even reward this Fed increase, as opposed to the usual declines when the Fed is hiking rates. A boost to equities and bonds may result from a Fed signal of its commitment to fighting inflation. Chairman Warsh muddied the waters about his commitment to fight inflation back in July, and a Fed increase this time around will provide a boost to the inflation-fighting hawks and welcome relief to both stock and bond markets.

Fed Chair Tries to Set the Record Straight

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

Back in July, the new Fed Chair, Kevin Warsh, took a beating from the markets. In one of his first appearances as head of the Fed, markets interpreted Warsh as not willing to commit to fighting inflation. He suggested that rising yields on Treasury bonds were doing some of the Fed’s work for it. Warsh’s reluctance to provide guidance on rate increases caused a whiplash in equity and bond markets.

So last week, when Warsh and others gathered in Jackson Hole, Wyoming, for the annual gathering of Fed officials, what else would one expect him to say? He had to redeem himself, and that’s what he did. He was more explicit in the Fed’s commitment to fight inflation and provided guidance that the Fed would be focused on prices. The market reaction was not that severe, suggesting that markets had approved of the purported commitment to price control.

Since that July meeting, yields on both the 10-year and 30-year Treasury bonds have remained elevated. The 10-year yield is around 4.7%, while the 30-year is above 5%. This means higher interest costs for the U.S. government and higher borrowing costs for consumers. Interest on the debt is now the third-largest item in the federal budget, behind only Social Security and Medicare, and is higher than the entire defense budget. Mortgage rates are about where they were in late July, averaging about 6.7%. The goal of Treasury Secretary Scott Bessent to bring long-term Treasury yields down is not moving in the right direction.

It will all depend on the next round of inflation readings. Both the CPI and the preferred Fed indicator, the PCE Price Index, remain above the Fed’s preferred 2% target. However, in the last three months, the CPI puts an annual rate of inflation of less than 2%. And while the labor market remains “strong,” it is showing some signs of renewed weakness. The combination puts the Fed in a tough spot. When it is all said and done, the weaker labor market, if national payrolls continue to undershoot, will take priority over inflation.

A look back shows that payroll growth was even lower in 2025. Preliminary payroll revisions were released last week, and the BLS reported that job growth for most of 2025 and early 2026 was weaker by 79,000 jobs. Had it not been for an increase of government jobs by 99,000, the picture would have been even worse. Private sector payrolls were 178,000 lower than originally reported. That means the previously stated average of 23,000 per month was even less than that.

There continues to be an emerging bright spot in the national economy, and that is manufacturing. This should come as a boon to Indiana and Kentucky. It took more than a year to work through the tariff mess, and that is one of the reasons manufacturing continues to see some pickup. Unfortunately, the latest tariff battle with Canada is not going to help, especially for states with significant trade with the country’s northern neighbor.

Odds are now pointing to a possible hike by the Fed in September. More than likely, the Fed will not move, keeping rates at the current level. Another weak labor report and CPI reports showing a meaningful decline in inflation may even bring about a cut before year end.

Why the Fed Is Moving Closer to a Rate Cut

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

— Despite Growing Talk of a Rate Increase

There’s been a lot of debate about whether the Fed should cut or increase interest rates. The year started with expectations that the Fed would need to cut rates several times throughout the year. Then the Iran conflict kicked off in February, causing a resumption of higher prices, especially at the gas pump.

A resurging Consumer Price Index (CPI) then shifted the discussion to why the Fed might need to increase interest rates, with several Fed officials voicing their support for rate increases. At the most recent Fed meeting, there were three dissents against the decision to leave rates unchanged, with all three supporting a rate increase.

In my last column, I suggested that the Fed should in fact hold, but that there was a chance we could see a cut by the end of this year. Based on some of the recent economic data, we are moving closer to that happening.

The last employment report showed the economy lost 23,000 jobs in July. This was a big miss, with economists expecting a sizable increase in payrolls. Even worse, May and June payroll numbers were revised downward by a combined 103,000 jobs, putting both months at an average of only 41,000 jobs.

The year started out with stronger payroll gains, with gains in three out of the first four months exceeding the payroll gain of any month in 2025. Since then, job growth has been less than impressive.

Not only have payrolls been sluggish, employment from the household survey has also been moving in the wrong direction. Employment fell in July by 87,000 and is down by around 1 million from last year. That means about 1 million fewer workers are employed than a year ago.

Part of this is due to a shrinking labor force. The nation’s labor force is down about 1.4 million from last year, and the participation rate, the percentage of the working-age population either employed or looking for work, is down almost a full percentage point from last year.

Fewer workers available makes it more difficult to create jobs. You can’t create a job if there is no worker to fill the position! A declining labor force will push employers to rely more on capital instead of labor, boosting things like productivity and profitability, both positives for the economy.

Our Mid-Year Economic Outlook back in May expected regional payrolls, particularly Louisville Metro, to pick up. This was largely due to the signals we saw in manufacturing. There was at least one positive in the last jobs report, and that was in manufacturing.

Manufacturing added 5,000 jobs across the nation. While this is not a large number, manufacturing is finally seeing a turnaround from the dismal growth of the last few years. Manufacturing payrolls are beginning to pick up, and this will come as good news for states like Indiana and Kentucky. We are not going to see massive gains in manufacturing jobs, but the region should see a pickup in employment due to activity in manufacturing.

The other reason the Fed is likely to hold at its September meeting, setting itself up for a possible cut later this year, is on the inflation front. Inflation is on the downward slope again. Prices are not declining, but the rate of change is getting smaller. Over the past three months, the headline CPI has increased by only about 0.2%. Annualized, that puts the recent pace of inflation at less than 1%. And we get the same result if we remove the cost of food and energy.

If we continue to see weak payroll growth, as we have over the past couple of months, along with continued improvement on the inflation front, the argument for keeping interest rates elevated will become increasingly difficult to make. Another weak jobs report could be enough to move the Fed from holding rates steady to cutting them before the end of the year.

From Tariffs to Tensions: Why Interest Rates Keep Changing

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

One of the beneficiaries of last year’s labor market weakness was a decline in the 10-year Treasury yield. When the economy begins to weaken, investors often shift toward the safety of U.S. Treasury securities. As demand for Treasuries rises, their prices increase and yields decline. Because the 10-year Treasury yield heavily influences mortgage rates and many consumer loans, lower Treasury yields are often followed by lower borrowing costs for households.

At the beginning of 2025, the 10-year Treasury yield had climbed to nearly 4.8%. Investors were pricing in stronger economic growth driven by expectations of deregulation and a more business-friendly policy environment. Thirty-year mortgage rates approached 7%.

Then came Liberation Day on April 2. By that point, the 10-year yield had fallen to roughly 4.0%. However, uncertainty surrounding tariffs and their potential inflationary effects quickly reversed that trend. By July 2025, the 10-year yield had climbed back toward 4.5%.

That uncertainty eventually showed up in the labor market. Hiring slowed dramatically as businesses delayed investment and expansion decisions. By year-end, 2025 had become one of the weakest years for job creation in more than two decades outside of a recession. As labor market conditions softened, the 10-year Treasury yield declined once again, falling back to around 4.0%, and mortgage rates followed. By March 2026, the average 30-year mortgage rate had eased to around 6.2%.

The conflict with Iran, which began in early 2026, quickly altered the outlook. Energy prices moved higher, pushing the Consumer Price Index upward to 4.2%. As inflation expectations increased, the 10-year Treasury yield rose to approximately 4.5% by June, while 30-year mortgage rates increased to about 6.6%.

Markets briefly received some relief following the ceasefire agreement. Treasury yields eased modestly to roughly 4.4%, and mortgage rates declined to approximately 6.4%.

More recently, renewed tensions and the breakdown of the ceasefire have pushed oil prices back toward the $100-per-barrel range. Treasury yields and mortgage rates have reversed course once again, with the 10-year Treasury yield now hitting 4.7% and 30-year mortgage rates climbing back to roughly 6.7%.

The latest inflation report, however, offered some encouraging news. Headline CPI fell 0.4% on a month-over-month basis, largely reflecting the sharp decline in energy prices following the ceasefire memorandum of understanding. The improvement was not limited to energy. Core inflation, which excludes food and energy prices, was flat for the month, while the year-over-year core CPI rate declined from 2.9% to 2.6%.

These shifting conditions have changed expectations for Federal Reserve policy. While some market participants have discussed the possibility of another rate increase, such a move appears unlikely at this point. The first half of 2026 produced stronger hiring than the exceptionally weak pace seen in 2025, but the most recent employment report was disappointing. Job growth came in well below expectations, while both employment and labor force participation declined. One month does not establish a trend, but renewed uncertainty surrounding tariffs could once again weigh on business investment and hiring.

The most recent Fed meeting was a hold, but the bond market reacted quite negatively as perceptions of Fed Chair Warsh’s commitment to fighting inflation worsened.

It is also worth noting that much of the economy’s recent strength has been concentrated in a few areas. Without continued investment in artificial intelligence and steady hiring in healthcare, overall GDP growth would have been considerably weaker, and the national conversation might be centered on job losses rather than job gains. 2nd quarter GDP out last week showed the economy softened.

Despite recent geopolitical developments and surge in bond yields, financial markets continue to expect inflation to remain relatively well contained over the longer run. Five-year market-based inflation expectations remain near 2.3%. Assuming geopolitical tensions ease and energy prices stabilize, inflation should continue moving lower, providing the Federal Reserve with additional room to leave interest rates unchanged this year. Continued masking of the economy behind AI and healthcare might even provide the Fed with ammunition for a 4th quarter cut.

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.