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.
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