Economic impacts on Kentucky and Indiana

By Uric Dufrene

Sanders Chair in Business

IU Southeast

Coming out of the pandemic, the Indiana and Kentucky economies fared quite well. Kentucky was one of the leading states with respect to job creation, and Indiana consistently saw unemployment rates that were under the national average. As the national economy continues to move toward a softening, along with the ongoing manufacturing slump, we examine the impact of manufacturing job growth across Indiana and Kentucky. 

First , both states have a heavy concentration of manufacturing jobs, and any changes in the macroeconomy will be felt locally. Nationally, manufacturing has been experiencing slower growth, and some have even described it as a manufacturing recession.

The ISM Index, a measure used to show growth or contraction in manufacturing, has been under 50 since November 2022, except for one month, March 2024. A reading under 50 signifies contraction, and over 50 expansions.   With a slower manufacturing environment, orders are being fulfilled, unlike the supply chain-challenged days of the pandemic. The ISM backlog orders index, for example, has been trending down for all of 2024, signaling that manufacturers are having less difficulty fulfilling orders.

Industrial production, a measure of the nation’s manufacturing activity, moved into negative territory last June, and has hovered around negative to slightly positive since. Durable goods orders, a leading indicator of future economic activity, have been trending downward for all of 2024. Orders plummeted last month and are now at negative year-over-year changes.  The sluggishness in orders does not portend vigorous manufacturing activity ahead. A declining interest rate environment will work to reverse this trend, but the impact will not be immediate. 

We can see the impact of the national manufacturing slowdown on payrolls across Indiana and Kentucky, as well as the region. The manufacturing employment concentration in Indiana is greater than 2, which implies that the proportion of workers employed in manufacturing is twice the national average. In Kentucky, while higher than the national average, the employment concentration in Kentucky manufacturing is 1.5, which implies that the proportion of workers employed in manufacturing is 150% higher than the national average. Thus, we expect any national slowing in manufacturing will have a greater impact on Indiana versus Kentucky.

Indiana manufacturing jobs peaked in August 2022, at 544,000. Since then, manufacturing payrolls have been on a steady decline, with the latest count at 531,000. This puts manufacturing employment down almost 15,000 jobs over the past 18 months, while overall job growth is up 71,000 over that same period.  The metro areas of Elkhart-Goshen, Columbus, and Muncie are experiencing a negative change in payroll growth, with Bloomington and Terre Haute hovering just above 0, basically flat.    The decline is not as significant in Kentucky, but the state has less than ½ of the manufacturing jobs of Indiana. Since August 2022, Kentucky has been seeing a small gain in manufacturing, compared to the loss of 15,000 in Indiana. However, since peaking in October 2023, manufacturing payrolls are now down almost 3,000. In Kentucky  All metro areas in Kentucky are seeing positive job growth, with Owensboro and Louisville Metro seeing growth of less than 1%. 

To be sure, job growth across both states continues to expand, but at slower rates. Indiana payroll growth has slowed to 1.4%, year over year, compared to 2% in early 2023. Kentucky growth has slowed to 1.3% year over year, compared to more than 3% in early 2023. While manufacturing does not employ the numbers from twenty years ago, both states continue to employ a greater percentage of workers compared to nationally. Consequently, the national manufacturing slowdown will also have an impact on regional payroll growth. Louisville area manufacturing is down close to 2,000 payrolls over the year, and Southern Indiana saw negative manufacturing job growth for the final three quarters in 2023. We can also see the overall softening with higher unemployment rates in both states: 4.6% (compared to 4.1% last year) in Kentucky and 3.7% (compared to 3.3% last year) in Indiana.

The leading contributor to job growth for both Indiana and Kentucky has been healthcare. Over the year, Indiana and Kentucky gained 15,000 and 14,000 healthcare jobs respectively. In the past two years, these amounts have doubled. Over the past year, health care is responsible for ½ of the job growth in Kentucky and around a third in Indiana.

In our last column, we suggested that the Fed would likely cut interest rates in September, with an outside chance of one happening in July. The CPI report was released last week, and it showed inflation came in weaker than expected, declining by .10% over the month. The super core CPI, which strips away food, energy and shelter, was under 2%.  So, the Fed did receive the CPI print to justify a September cut. The missing piece for a July cut was on the labor side. The last employment report did show some labor market softening, with another uptick in the unemployment rate. Overall payroll growth was still strong, however, rising by another 206,000.  Probability now shows the first cut for September.  As the labor market continues to soften, and assuming the disinflation trend, we should see three rate reductions for the rest of the year. 

Uric Dufrene is president of FEI Louisville and can be reached at udufrene@iu.edu.