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

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.