State of the Economy

The latest economic data point to a continued cooling in both Kentucky’s and the nation’s economy. While some labor market indicators in Kentucky performed better than the U.S. overall in 2025, employment growth in the state has slowed since late spring, tracking closely with the national slowdown. National GDP expanded in the second and third quarters of 2025, driven by consumer spending, net exports, and government spending, though investment declined alongside a softer labor market. Inflation remains above the Federal Reserve’s target, and consumer sentiment has weakened further, reaching a new low in November and remaining well below levels seen at the end of 2024.

Here are five things to know about the economy as of January 19, 2026.

Job growth has slowed in both Kentucky and the U.S.
 

• How we look at jobs: This chart displays job growth by showing the 12-month change in jobs as a percentage, which allows for more direct comparisons between Kentucky and the U.S. and removes the seasonality of month-to-month changes.
• Slower growth: Job growth slowed in the U.S. throughout most of 2025. Kentucky saw positive changes in job growth in early 2025, but growth began slowing after May.
   

Hiring is weak, but layoffs are mostly stable—creating a "slow hire/slow fire" dynamic.
 

• Slow hire: Hiring in both Kentucky and the U.S. has deteriorated slowly. While the hiring rate in Kentucky was higher throughout much of 2025, it began falling in May 2025. 
• Slow fire: Layoffs and discharges held steady before increasing slightly with more recent months’ estimates. Firms appear less willing to hire, but also reluctant to make any major changes. Some call this a slow hire/slow fire labor market. 
• Layoffs in the news: Media stories of mass layoff announcements usually provoke more concern than is warranted. BLS data suggest there are around 1.7 million layoffs and discharges every month in the US. That said, recent preliminary estimates show a small increase in layoffs.
• Slow quit too: Quits have been low, suggesting workers aren’t finding (or expecting to find) better jobs than what they have.

National GDP grew in Q2 and Q3 of 2025, but business investments declined.
 

• What GDP is: Gross Domestic Product (GDP) = Consumption + Investment + Government spending + (Exports – Imports).
• Consumer spending: GDP growth in 2025:Q3 was driven by increases in consumer spending, net exports and government spending. The increase in consumer spending reflected increases in both goods and services. Among services, health care and “other services” were the leading contributors. Among goods, recreational goods, vehicles and “other nondurable goods” (mainly prescription drugs) were leading contributors.
• Business investments: A concerning detail about both the 2025:Q2 and Q3 increases is that they masked decreases in investment. These decreases are consistent with a cooling labor market despite GDP growth. 
• Imports: The main driver of the decline in GDP in 2025:Q1 was a large increase in imports as firms pulled forward imports in anticipation of tariffs. The apparent rebound in 2025:Q2 was then associated with a decline in imports.
• Kentucky: The importance of manufacturing and wholesale trade to Kentucky likely explain why the changes in early 2025 were more pronounced for KY than for the US. The 2025:Q3 GDP estimate for the state is scheduled for release on January 23.
• Early estimates: The Atlanta Fed’s early GDPNow estimate for 2025:Q4 suggests continued growth through the end of 2025.

Inflation remains higher than the Federal Reserve’s target rate.
 

• Core PCE & the Fed: Core Personal Consumption Expenditures (PCE)—which excludes food and energy—is the Federal Reserve’s preferred inflation metric. The Fed targets 2% inflation using Core PCE, which the US has not seen since 2021.
• The tariffs effect: The increase in inflation shown since April 2025 is consistent with the effects of tariffs; however, those effects were very likely blunted by the anticipatory increase in imports earlier in the year discussed in slide 3 (GDP). Firms appear reluctant to raise prices until they run through the inventories they accumulated earlier. It is possible that many are hoping they can wait out the worst of the tariffs and import more after deals are struck or the Supreme Court rules.

Consumer sentiment has improved since reaching at all-time low in November.
 

• Consumer sentiment: The University of Michigan has produced an index of consumer sentiment since 1961 and updates it monthly.
• All-time low last November: The November 2025 reading of 51.0 was an all-time low on the index. 
• January 2026 lower than 2025: The preliminary estimate for January 2026, 54.0, is 24.7% lower than January 2025.

On this web page, we provide economic updates on Kentucky and the United States, using a range of key metrics from the U.S. Department of Labor, U.S. Bureau of Economic Analysis, the University of Michigan, the St. Louis Federal Reserve, and the U.S. Chamber of Commerce. All data is analyzed by the Kentucky Chamber Center for Policy and Research. On this page, we cover jobs, unemployment, unemployment insurance claims, hiring, workforce participation, inflation, consumer sentiment, and small business optimism.  

Sources
Federal Reserve Bank of St. Louis, Federal Reserve Economic Data
MetLife and U.S. Chamber of Commerce, Small Business Index
University of Michigan, Survey Research Center, Surveys of Consumers
U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Price Index
U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics
U.S. Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey
U.S. Department of Labor, Employment and Training Administration, Unemployment Insurance Data
U.S. Federal Reserve, Economy at a Glance – Inflation (PCE) 
ADP Employment Report
Carlyle
Revelio Labs

The Kentucky Chamber hosted a webinar on June 9, 2025, featuring Vice President of Policy Charles Aull and Erica York, Vice President of Federal Tax Policy at the Tax Foundation, to explore how tariff and tax policies in Washington are shaping the economic landscape for Kentucky businesses.

Watch the webinar below:

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