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.
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