From Dot-Coms to Data Center: What Past Booms Can Teach Us About AI

by with No Comment 1si NewsEconomic Development
submitted by Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast
 

Are there similarities between what we are seeing today with artificial intelligence, and the massive investment required to build the data-center infrastructure that supports it, and the dot-com collapse or the housing crisis that led to the Great Recession? It’s a reasonable question, and one worth examining.

To answer it, we need to go back to the late 1990s.

As the calendar approached the year 2000, companies poured billions of dollars into technology upgrades to prepare for Y2K. Dire predictions circulated about elevators failing and planes falling from the sky when the clock rolled over to January 1, 2000. None of that happened. But the investment surge was real.

At the same time, the internet was rapidly gaining traction. Businesses were building websites, consumers were beginning to shop online, and entirely new business models emerged that relied exclusively on the internet. Innovation was real, but so was speculation. Stock prices soared, especially in technology shares. The NASDAQ Composite nearly doubled between 1998 and its peak in early 2000.

When earnings and profits failed to match lofty expectations, valuations collapsed. Remember the infamous pets.com. The NASDAQ ultimately fell nearly 80% from peak to trough, contributing to the 2001 recession. It would take roughly 15 years for the index to fully recover the value lost during the dot-com implosion.

As always, investors then went searching for returns elsewhere. Capital flows to the highest rate of return, adjusting for risk.

In the mid-2000s, that search increasingly led to structured mortgage products, most notably mortgage-backed securities and collateralized debt obligations. These instruments pooled mortgage payments and passed the cash flows through to investors. Because housing prices had risen steadily for decades, these securities were widely viewed as lower risk.

Demand surged. To meet it, lenders originated more mortgages, often with weaker underwriting standards. Adjustable-rate mortgages proliferated, loan-to-value ratios climbed, and in some cases mortgages exceeded the value of the homes themselves. As long as home prices kept rising, the system appeared stable. 

That stability proved illusory. When interest rates reset higher and borrowers began missing payments, the cash flows supporting these securities deteriorated. Losses spread quickly through the financial system, triggering the 2008 financial crisis and the Great Recession, the most severe economic contraction since the Great Depression. The pets.com implosion years earlier ultimately turned into the Great Recession. 

So how does artificial intelligence fit into this historical comparison?

Once again, we are witnessing massive investment tied to transformative technology. Hundreds of billions of dollars—and potentially more than a trillion globally over the coming decade—are being invested in data centers, power infrastructure, and advanced semiconductor capacity to support AI. These investments are helping fuel equity markets, with a small group of large technology firms—the so-called “Magnificent Seven”—accounting for a disproportionate share of recent stock market gains.

As in prior cycles, leverage is playing a role. Much of this build-out is being financed with debt. While some of that debt is long-term, concerns are emerging about mismatches between financing structures and the underlying assets. Data centers may last decades, but the chips inside them often have useful lives measured in just a few years. Financing rapidly depreciating technology with long-dated debt introduces risk.

Markets have already shown sensitivity to that risk. Recently, disappointing news from a handful of AI-infrastructure firms triggered sharp reactions in equity prices. High expectations are embedded in today’s valuations, and much must go right for projected returns to materialize. Ultimately, someone must service the debt and deliver returns to capital providers.

That does not mean an AI-driven collapse is inevitable. There are important differences from past cycles. Many of today’s leading technology firms are profitable, cash-rich, and generating real revenue growth. AI is delivering tangible productivity gains, not just speculative promise.

Still, history offers a cautionary lesson. Periods of transformative innovation are often accompanied by overinvestment, financial excess, and unrealistic expectations. When returns fail to materialize as quickly or as broadly as hoped, markets adjust—sometimes abruptly.

The risk is not artificial intelligence itself. The risk lies in how aggressively it is being financed, how optimistic the assumptions have become, and whether capital discipline is maintained. History doesn’t repeat, but it often rhymes—and investors would be wise to remember that as the AI investment cycle continues to unfold.

The “No-Hire, No-Fire” Economy: What the Latest Data Really Shows

by with No Comment 1si NewsEconomic Development
Submitted by Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast
 

We are finally beginning to see key economic data emerge following the nation’s longest government shutdown. While some releases are more dated than usual, they still shed important light on the current state of the U.S. economy.

The phrase “a no-hire and no-fire economy” remains fitting and describes today’s labor market well. Conditions are clearly softer than a year ago. The unemployment rate, at 4.3%, is still historically low, but the nation’s job creation engine continues to cool. The September BLS report showed a gain of 119,000 jobs, with only 97,000 coming from the private sector. Revisions for July and August moved both months downward, with August now showing a decline of 4,000 jobs.

Healthcare again led the way, adding 43,000 jobs, accounting for nearly half of all jobs created. Food services and drinking places was the second-strongest contributor.

But weakness is visible across several economically sensitive sectors. Transportation and warehousing lost 25,000 jobs. When the economic engine is accelerating, we normally see strong gains here, as goods are produced, shipped, and stored. Manufacturing lost another 6,000 jobs, continuing a trend that has yet to show any meaningful benefit from tariffs. Professional and business services, a key leading indicator of broader economic activity, fell by 20,000, with temporary labor accounting for 16,000 of that decline. Employers tend to cut temporary labor first when conditions weaken, and add those workers back first when the cycle turns. So, these losses are noteworthy.

Digging deeper, the lowest unemployment rate by occupation group was in management, business, and financial operations, interesting given the headlines about AI-driven job destruction. The highest unemployment rates were in farming, fishing, and forestry (7.4%), followed by transportation and material moving (5.5%), and production occupations (4.7%).

Initial claims for unemployment continue to run at historically low levels, but continuing claims are not declining. These combined statistics suggest that it is taking longer for the unemployed to find work. Those unemployed for 15 weeks or longer have increased by 350,000 since last year.

The bottom line: This is an economy that is not generating a significant number of jobs, and that is the primary reason the Federal Reserve is likely to cut rates again in December. As we noted several columns ago, the Fed would eventually shift its concern toward the labor market. At that time, we projected three additional rate cuts in 2025. We have now seen two cuts, with one meeting left this year. The CME Fed Watch Tool shows an 86% probability of a December cut, a jump that followed comments from New York Fed President John Williams signaling support for further easing.

Turning to consumers, early Black Friday reports indicate spending will surpass last year’s levels. Black Friday continues to blend value-driven shopping with experiential activity, so it is still too early to declare the full holiday season’s performance. However, the National Retail Federation is projecting growth, and the initial data support that outlook. Wage growth continues to outpace inflation, additional fuel for consumer spending.

Still, the Fed is justified in cutting rates in December, especially with rising concerns about the labor market. The economy has been propped up by strong consumer spending, but consumer strength ultimately depends on employment. The latest retail sales report showed a decline, and consumer confidence has taken another hit. Continued labor market weakness could eventually derail the resilient consumer and tip the economy into recession. We are not there yet, but the Fed is wise to act now to help prevent that outcome.

What to Expect in 2026: Regional Strength Meets National Softening

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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?

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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.