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

by with No Comment 1si NewsEconomic Development

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

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

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

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

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

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

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

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

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

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

by with No Comment 1si NewsEconomic Development

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

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

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

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

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

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

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

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

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

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

by with No Comment Economic Development

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

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

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

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

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

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

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

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

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

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

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

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

by with No Comment 1si NewsEconomic Development

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

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

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

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

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

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

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

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

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

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

Southern Indiana’s Next Strategy: The ‘FOURIDOR’

by with No Comment 1si News1si Press ReleaseAdvocacyEconomic Development
By Lance Allison, President & CEO, One Southern Indiana 

Southern Indiana is on the cusp of transformational growth. Recent announcements totaling more than 4,000 new jobs and over $2.5 billion in capital investments are not just numbers on a page, they are real signs of a region on the rise. The challenge now is ensuring these investments translate into long-term success. This moment demands more than celebration, it demands vision, coordination, and a relentless commitment to shaping the future. 

At One Southern Indiana (1si), we believe the formula for success is clear: a strong mix of industrial development, job creation, housing growth, and quality of life enhancements. That formula is already working. At 1si, we understand that true progress comes from collaboration, foresight, and balance. That’s why we continue to work hand-in-hand with private partners, municipalities, and regional stakeholders to ensure Southern Indiana not only keeps its momentum but accelerates it. 

But no community succeeds in a vacuum. The future of Southern Indiana hinges on continued strategic investments not only locally, but also across the state. We must keep pushing for infrastructure upgrades, workforce development, site readiness, and policies that support both large-scale industry and small businesses that make our communities unique. That’s how we ensure our recent wins aren’t fleeting—but become the foundation for a more resilient economy. 

One of our most persistent and paradoxical challenges is also one of our greatest assets: our regional relationship with Louisville, Kentucky. The Ohio River may separate us physically, but Southern Indiana and Louisville are deeply interconnected economically, socially, and culturally. This bi-state dynamic has created complexities when it comes to external branding and targeted industry attraction, but it also offers one of our greatest advantages: access to a broad, skilled workforce and a shared infrastructure that spans two states. 

Rather than shy away from this complexity, 1si is leaning into it. We believe it’s time to reimagine how our region is presented on the national and global stage. Together with our partners, we’re taking bold steps to define a regional identity that reflects our strengths, potential, and unique logistics advantage. 

That’s why we’re excited to unveil a new regional ecosystem identity in the coming months: The FOURIDOR. Developed in partnership with Duke Energy and local collaborators, this brand is more than a name, it’s a statement about who we are and what we offer. Derived from the word “corridor,” the FOURIDOR emphasizes our four R’s: River, Rail, Roads, and Runways. These aren’t just infrastructure assets, they represent a logistics and transportation network that gives our region a competitive edge unlike any other. 

Much like the Research Triangle in North Carolina or Wall Street in New York, the FOURIDOR is designed to encapsulate a place where geography, proximity, talent, and industry align to create something truly exceptional. It reflects the real, strategic advantages we offer companies looking to grow, expand, or relocate. 

Southern Indiana is ready. We are ready to lead, ready to partner, and ready to make the most of this unprecedented moment in our region’s history. The future will be shaped by those who choose to act boldly—and we intend to be among them. As we move forward, 1si remains committed to working alongside our regional, state, and private sector partners to ensure that every opportunity is realized and every challenge is turned into a new path for progress. 

This is our time. Let’s build it—together. 

 

The Fouridor is made possible by the generous funding from the following businesses:
  • Duke Energy
  • The Koetter Group
  • Ports of Indiana – Jeffersonville
  • River Ridge Development Authority
  • Dan Cristiani Excavating Co., Inc.
  • Mac Construction & Excavating, Inc.
  • Frost Brown Todd, LLP
  • Clark County REMC
  • Southern Indiana Works
  • CenterPoint Energy

Economic Update | Southern Indiana’s Strength in a Diversifying Economy 

by with No Comment Economic Development

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

After falling more than 19% following “Liberation Day” on April 2nd, the S&P 500 has not only recovered but surged to reach new all-time highs. Just a few months ago, many were forecasting a grim outlook—stagflation, characterized by rising prices and slowing growth, seemed likely. Consumer sentiment plunged, inflation expectations soared, and financial markets responded with rising Treasury yields and a weakening dollar—an unusual pairing that signaled investor anxiety. 

Fast forward three months, and the landscape looks markedly different. The stock market has fully erased its losses and climbed to record levels. Consumer sentiment is rebounding, and inflation has not yet shown any impact from actual and proposed tariffs. In our last column, we raised the possibility of a summer surprise in the form of a Fed rate cut. Since then, two Federal Reserve Governors—Christopher Waller and Michelle Bowman—have publicly supported a cut in July. While market odds still suggest the first cut is more likely in September, a July move remains on the table. The Fed Watch Tool now shows expectations of three rate cuts in 2025. 

So, what explains this sharp market rebound? 

First, investors appear to have priced in a more moderate version of the Liberation Day tariffs. While some level of tariffs is still expected, the most severe proposals from April seem less likely. Second, recent inflation data have yet to reflect any tariff-driven price increases, which keeps pressure off the Fed and increases the likelihood of future rate cuts. A soft June jobs report combined with continued easing in inflation could be enough to prompt action in July. And third, although some economic indicators have softened, the broader picture still suggests the U.S. is likely to avoid a recession—at least this year. 

One area that continues to struggle, however, is manufacturing. Despite the political rhetoric around tariffs benefiting domestic industry, the data tell a different story. Manufacturing activity remains in contraction, with the ISM Index staying below 50. National manufacturing payrolls have declined in most months since the third quarter of 2023. Regional indicators, such as the Empire State Manufacturing Survey, the Philly Fed, Kansas City Fed, and Richmond Fed indexes, also reflect a challenging environment. Based on the evidence so far, tariffs—or even the threat of them—appear to be doing more harm than good for U.S. manufacturers. 

Meanwhile, Southern Indiana continues to show strength. Recently released payroll data for Indiana metro areas reveal that Southern Indiana posted one of the strongest job growth rates in the state—adding 1,703 jobs in the fourth quarter of 2024 (pre-tariff issue) compared to the same period a year earlier. Only Indianapolis saw a larger increase, as expected given its size. 

Notably, the two most manufacturing-intensive metro areas in the state—Columbus and Elkhart-Goshen—experienced overall job losses. In contrast, the three least manufacturing-dependent metros—Indianapolis, Muncie, and Southern Indiana—all recorded job gains. Other regions with job declines include the Indiana portions of the Cincinnati metro, Evansville, and Michigan City. In each of these areas, manufacturing remains the dominant or near-dominant sector. 

The takeaway is clear: economic diversification matters. Southern Indiana’s continued growth, despite broader manufacturing weakness, underscores the advantages of a more balanced and resilient economic base. 

Economic Update | Data Dependency and the Fed: Are Rate Cuts Around the Corner?

by with No Comment 1si NewsEconomic Development

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

You’ve likely heard the term “data dependent” when Federal Reserve officials, including Chairman Jerome Powell, discuss monetary policy. The phrase is often used to justify interest rate decisions based on evolving economic conditions. 

Last September, for example, the Fed lowered the target Federal Funds rate by 50 basis points, citing signs of a cooling labor market and declining inflation as justification for the cut. A second reduction of 25 basis points followed shortly after the presidential election. Since then, the Fed Funds rate has held steady at 4.5%. 

Today, both political and economic commentators are again weighing in — many arguing that it’s time for another cut. With data dependency still guiding the Fed’s decision-making, the evidence could support both the case for a cut and the case for standing pat. Let’s take a closer look at the data. 

While many expect the Fed to hold rates steady in June, a summer surprise remains very much on the table. 

Inflation: The Fed’s Primary Target 

Inflation remains central to the Fed’s analysis. Back in September 2024, the Consumer Price Index (CPI) stood at 2.4%, with core CPI (excluding food and energy) at 3.3%. Those readings were part of the Fed’s rationale for easing rates at the time. 

Fast forward to 2025: CPI remains at 2.4%, but core CPI has declined to 2.8%, a modest but meaningful improvement. From a data-dependent lens, this continued decline in core inflation strengthens the argument for a rate cut. 

The Fed’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) Price Index, tells a similar story. Last September, core PCE was at 2.7%; today, it stands at 2.5%. Again, this supports the notion that inflation is moving in the right direction. 

Labor Market: Signs of Softening 

Labor market data played a significant role in last year’s rate reductions, and similar dynamics are present now. 

In September 2024, weekly unemployment claims hovered around 230,000. Currently, claims remain in that same range — fluctuating slightly but staying consistent with a stable labor market that shows no imminent signs of recession. 

Payroll growth tells a slightly different story. Last September, payrolls rose by an impressive 230,000 jobs.  But for the first five months of 2025, monthly payroll growth has averaged just 124,000. This represents a notable slowdown from the 165,000 monthly average seen in 2024 — suggesting a gradually cooling labor market. 

Other employment indicators also support the case for easing. The Job Openings and Labor Turnover Survey (JOLTS) shows that job openings continue to exceed the number of unemployed workers by approximately 200,000 — similar to last year, but down significantly from the post-pandemic imbalance. Labor supply and demand are moving into better balance. 

Wage growth has also moderated. Average weekly earnings, which were rising at a 4.3% year-over-year pace last year, have now slowed to 4%. This easing wage pressure further reduces concerns about a wage-price spiral. 

The household employment survey provides additional evidence of labor market softening. In the lead-up to last year’s 50-basis-point cut, household employment rose by over 600,000 jobs, including a gain of 375,000 in September alone. This year, household employment has declined by 620,000 since January, including a 700,000 drop in May. The unemployment rate has ticked up slightly to 4.2% from 4.1% last fall — another signal of a gradually weakening labor market. 

Uncertainty: Less of a Headwind Today 

One argument for caution is heightened uncertainty, particularly surrounding trade policy and tariffs. But even this concern has moderated somewhat. In late 2024, the NFIB Small Business Uncertainty Index hit an all-time high as election-season rhetoric fueled concerns about tariff policies. While trade policy remains unsettled, today’s uncertainty levels are considerably lower than they were last fall. 

A Summer Surprise? 

If the Fed chooses to hold steady at its June meeting, the stage may still be set for rate reductions later this summer. Given the Fed’s stated commitment to data dependency, both inflation and labor market indicators now point toward conditions that justified cuts just months ago. 

Whether the Fed chooses to act in July or later, one thing is clear: the data may soon leave policymakers with little choice but to begin easing rates once again. 

Economic Update | Tariffs, Trade, and the Market’s Message

by with No Comment 1si NewsEconomic Development

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

Liberation Day, as coined by the current administration, was intended to represent the freeing of the U.S. economy from “devastating” imports, the beginning of the restoration of U.S. manufacturing, and ultimately reducing “destructive” trade deficits.     

But the market had other ideas. 

The announcement of Liberation Day was then met by an almost 1,700-point drop in the Dow Jones Industrial Average. How liberating.    

Given that stock prices are based on a combination of both current earnings and future earnings–along with risk–a significant drop in the Dow is difficult to reconcile with liberation from being “ripped off”.     The violent market reaction on April 2nd reflected one thing: a recalibration toward slower economic growth and weaker earnings potential.    

Just a week later, on April 9th, after a confounding combination of increasing 10-Year Treasury yields and a declining dollar value—increasing Treasury yields usually result in a stronger dollar–the administration announced a 90-day pause, except for China, of the so-called reciprocal tariffs.  The April 2nd tariff calculations could generously be described as bewildering and had spooked the market. The pause, however, sparked a celebration, sending the Dow soaring nearly 3,000 points.  Over the following month, the Dow then added another 641 points.   

Then came May 12th. The administration announced a reduction of the 145% tariffs on China down to 10%, with another 20% for the fentanyl concerns. Once again, markets cheered, and the Dow surged another 1,200 points. As of this writing, the index has stabilized near its May 12th level, still about 2,400 points off the record high. 

So, what have we learned? 

Markets do not like tariffs.  Every pause, rollback, or softening of the tariff rhetoric has been met with a surge.  The message is unmistakable.    

We know what the stock market is telling us about tariffs, but what could happen if tariff increases are ultimately sustained?   

In 2018, tariffs were implemented under the guise of restoring U.S. manufacturing. If that effort had succeeded, we’d expect to see the evidence in key indicators. We do have the data, and it tells a different story.   

At the start of 2018, just prior to the implementation of various tariffs, the ISM Index, a measure of the state of manufacturing, registered just under 60, firmly in expansion territory. In August 2018, shortly after the implementation of tariffs, the ISM peaked at 60 and then began a steady descent, entering contraction territory, and hitting a level of 48, just before the pandemic.    

Industrial production, an overall measure of manufacturing activity, peaked in September 2018, and then declined steadily through 2019, turning negative year over year, just before the pandemic.    

In short, no manufacturing surge followed the tariffs.   

Now, let’s look at jobs. 

One of the marquee moves in 2018 was the 25% tariff on steel, implemented in March. Both Kentucky and Indiana have significant employment in primary steel manufacturing and in fabricated metals, the latter of which uses steel to produce parts for automotive, construction, and consumer goods sectors. So, here’s what happened.     

At the start of 2018, primary steel manufacturers employed 53,000 across Indiana and Kentucky.  Just prior to Covid, employment stood at 54,000, an addition of 1,000 employees that existed prior to tariffs. Most recently, employment in both states was at 56,000, for an overall gain of 3,000 jobs.    

For fabricated metals, employment at the start of 2018 was at 83,000 across Indiana and Kentucky.  Just prior to Covid, employment had declined to 81,000. The most recent numbers show that employment in fabricated metals is now at 79,000, an overall loss of 4,000 jobs since early 2018.     

So, the industry that received protection from tariffs gained 3,000 jobs from 2018 to 2025. The industry that uses steel for its products lost 4,000 jobs. Add these together and we get a net result of a loss of 1,000 jobs across Indiana and Kentucky. Nationally, the story is even clearer: the change in jobs for both industries is a net negative of 6,100. Primary steel manufacturers show a plus 900 jobs, but fabricated metals lost 7,000 jobs. 

What we see is textbook tariff economics:  a few winners, often concentrated and visible, and many losers, dispersed and harder to quantify but no less real. The benefits accrue to protected industries, but the costs are spread widely across supply chains, businesses, and consumers. As tariffs increase, so do input costs. That weakens competitiveness, dampens investment, and leads to job losses in downstream industries.  And that’s why the stock market responds so dramatically.  It sees the broader economic damage. In the end, Liberation Day may have made for a strong headline.  But for the economy, and especially for financial markets, it’s been anything but liberating.