Posts in category: 1si News

Since October 2022, the ISM Manufacturing Index has been above 50 only once, a January reading that barely cleared the expansion threshold. Higher interest rates were the initial culprit behind the sector’s decline, followed more recently by tariffs, or at least the threat of tariffs. Regardless of the cause, manufacturing has remained in contraction territory for an extended period.

For manufacturing-rich regions such as Louisville Metro, Indiana, and Kentucky, this prolonged slowdown has mattered. Recent economic data, however, suggest the sector may be on the cusp of expansion, improving the outlook for these regions.

The latest encouraging signal comes from the ISM Index itself. The Institute for Supply Management’s monthly reading rose to 52.6, not only above 50 but also higher than the prior month and stronger than anticipated. Key subcomponents showed that both new orders and production moved into expansion territory, pointing to a more favorable near-term outlook.

The employment subindex also improved from the prior month, but it continues to signal contraction, now for 36 of the past 37 months. As we’ve discussed in prior columns, economic expansion does not necessarily translate into labor growth. The latest ISM report reinforces that view.

This divergence between growth and hiring helps explain recent productivity gains. The latest data show that unit labor costs declined by nearly 2 percent in the most recent quarter, while productivity rose by almost 5 percent. Workers are producing more output, and doing so more efficiently, which is helping to drive unit labor costs lower. These productivity gains, driven largely by investments in capital goods, support profitability while also helping to keep inflation in check.

The groundwork for these gains was laid years ago. In 2021, the economy experienced a near-gargantuan surge in industrial machinery investment, the largest one-year increase in more than three decades. Coming out of the pandemic, job openings far exceeded the number of available workers. Employers were forced to pivot, relying more on capital than labor simply because labor was scarce.

We are now beginning to see the payoff from those capital investments made five years ago. Some will attribute today’s productivity gains to artificial intelligence, but the shift toward capital-intensive production was set in motion well before AI became the latest headline. Growth in manufacturing accompanied by limited labor growth is likely to persist. Any reshoring of manufacturing back to the U.S. will require a competitive cost structure, and that means even more investment in automation, or capital over labor.

Productivity gains will be a key factor influencing the next Federal Reserve chair and could help justify additional rate cuts later this year, beyond what markets currently anticipate.

Turning to the labor market, the February employment report was delayed due to the brief government shutdown. The latest private-sector ADP report showed continued softness in hiring, with just 22,000 jobs added, well below expectations of 50,000. At the same time, unemployment claims remain at historically low levels, suggesting layoffs are not accelerating, despite recent high-profile announcements. Job openings, however, saw a steep decline from the prior month, hitting the lowest level since the Covid year. The job creation engine of the U.S. economy continues to sputter.

Closer to home, preliminary estimates suggest Louisville Metro will finish the year roughly flat in terms of job growth. The largest declines were seen in leisure and hospitality, which shed about 3,000 jobs, followed by transportation and warehousing, down roughly 2,000. The largest gains were in education and health services, and primarily healthcare, which added about 1,000 jobs.

As we start 2026, green shoots appear to be emerging in both manufacturing and the service side of the economy. Job growth may not fully reflect that improvement, which helps explain why the Federal Reserve may ultimately cut rates more aggressively than the two reductions currently priced into markets.