Leading economists in the Kentucky market say continued growth in jobs and wages in 2025 will keep consumer spending levels up and generate moderate economic expansion. Hiring won’t be as strong as the past two years, so growth is expected to be more modest than 2024’s 2.4% GDP growth and the healthy 3.2% expansion of 2023.

PNC Bank forecasts 1.9% growth in 2025, with a solid labor market holding steady through the year and the inflation rate making slow progress back toward the 2% level the Federal Reserve seeks in managing the benchmark interest rate it charges banking institutions.

Consumer spending is two-thirds of the $29 trillion U.S. economy, the world’s biggest and most important market. Thus, the confidence level of 346 million Americans is key to the world economy—and the 4.6 million Kentuckians who live and work within a day’s delivery of two-thirds of the U.S. market.

Baird, Kentucky’s largest wealth management advisor, says it expects continued expansion in the economy, driven by a healthy consumer and reinvigorated corporate sector.

Cincinnati-based Fifth Third Bank, among the nation’s 20 largest banking institutions and a major Kentucky financial services provider, forecasts “another year of growth in the United States, likely slower than last year as we face some new challenges and risks. Growth will be supported by consumers with low debt burdens and high spending power, a happy result of the low mortgage rates of the preceding decade.”

Mike Clark, who directs the Center for Business and Economic Research at the University of Kentucky Gatton College of Business and Economics, shares the outlook for slower but ongoing growth.

“Both the national and Kentucky economies appear to be on solid footing for 2025. Output is up, firms are adding workers to the payroll, and inflationary pressures have eased. I expect Kentucky’s economy will continue growing in 2025, but at a slower pace,” Clark said.

Dean Dorton, Kentucky’s largest accounting and business consultant, injects a note of drama into its 2025 forecast, seeing potential for a surge of merger and acquisition deals as a result both of pent-up capital wanting a place to go and as a means for companies to pursue a growth strategy.

‘The biggest reason for optimism’ 

“Buoyed by solid fundamentals, a strong labor market, favorable conditions for consumers, lower interest rates and slowing inflation, the U.S. economy should continue to experience growth in 2025, albeit at a more modest rate than we saw in 2024,” said PNC Chief Economist Gus Faucher.

“The excellent labor market is the biggest reason for optimism around the economy,” Foucher said. “And while the unemployment rate, at 4.1% in December 2024, is up from 3.4% at its lowest in 2023, it remains remarkably low. With businesses reporting hiring difficulties, layoffs at historic lows and initial claims for unemployment insurance down from mid-2024, the job market should remain strong throughout 2025.”

Kentucky’s jobless rate increased to 5.2% in December, the most recent report from Frankfort, but the 0.1 percentage point increase from November was attributed to the state’s labor force expanding at a faster rate than the positive level of jobs creation. The higher jobless rate, ironically, is considered a positive.

“This exceedingly strong labor market bodes well for consumer spending and household purchases in 2025. More jobs and rising wages translate to higher incomes,” Faucher said.

Clark, of UK’s economic research unit, offered deeper detail about Kentucky’s labor market. The commonwealth workforce grew 2% in 2024, much more than the 0.7% increase in the U.S. labor force.

“Firms are likely to continue hiring workers in 2025, but I expect employment growth to slow to just under 1%,” Clark said. “Most of the (2024) job growth occurred in Kentucky’s education and healthcare services sector.

“Employment in Kentucky’s manufacturing sector, however, was basically unchanged from 2023 to 2024. I expect employment in Kentucky’s manufacturing sector to remain steady or decline slightly. Manufacturers appear to have largely replenished, and demand for automobiles will likely remain somewhat muted by high financing costs.”

The Federal Reserve began lowering its federal funds rates in 2024 as data suggested the economy was starting to cool down, Clark said. This change in monetary policy signaled the Fed was shifting its focus from tamping down inflation to also supporting employment growth.

The Fed likely will continue lowering interest rates in 2025, he said. However, with labor market strength sustaining consumer spending, inflation has not fallen back to the Fed’s 2% target and the Fed will be cautious with its rate cuts.

“Further rate cuts in 2025 can be expected to support growth, particularly in rate-sensitive sectors like business investment and housing,” Foucher said.

This support for U.S. growth makes the Fed’s 2% inflation policy target harder to achieve, said Jeffrey Korzenik, chief economist for Fifth Third Commercial Bank.

“We would not be surprised if our central bankers modify their inflation goal to recognize an environment that has higher embedded inflation,” he said.

Meanwhile, the slowing of macro growth rates might prompt a hard look at acquiring growth. When Dean Dorton looked at the business landscape for 2025, it found four factors that indicate a new cycle of mergers and acquisitions.

Pent-Up Demand—Cycles typically last 12-24 months and three years into a slowdown, a rebound is overdue. With $1 trillion on hand translating into $2 trillion of leveraged purchasing power, pressure mounts on private equity firms to deploy capital.

Macroeconomic Shift—Fed rate cuts have lowered the cost of capital for deal-making. Restabilized inflation and resilient consumer spending boosts confidence among buyers and sellers alike.

Strategic Growth Needs—Companies are using M&A to acquire capabilities, talent and technology in response to transformative trends such as digitization and artificial intelligence. Inorganic strategies are vital for driving growth in a low-growth economy.

Favorable credit markets—Lending is the lifeblood of M&A. An extension of 2024’s lower costs and relaxed lending standards in credit markets would have a major impact.

Dean Dorton sees a 2025 marketplace with ample buyers, benefiting sellers who develop a strategy of understanding how their company fills a market need and knowing which buyers will aggressively pursue a purchase. Sellers will also want to consider the qualitative factors that are important to them in a sale, e.g., company legacy, employee retention, etc.

Immigration, tariffs disruptions a worry  

Business dislikes uncertainty and 2025 does include some uncertainty. A key center of this is public policy issues.

“The incoming presidential administration has listed several policy priorities that will help to shape the economy for the next few years,” Clark said. “At least two of these could have significant impacts on the economy.”

Immigration and tariff policy have the most potential to disrupt, he said.

Legal and illegal immigration has been a major source of the important labor supply growth, helping firms find workers and easing wage pressures. Aggressive immigration policy could slow labor supply growth, Clark said, and pose a challenge for the construction industry and other sectors reliant on foreign workers.

Meanwhile, Trump administration tariffs on goods imported into the U.S. could be substantial, and large tariffs would make imported goods more expensive for U.S. consumers. Higher tariffs benefit domestic producers by making foreign competition more expensive but will increase the price of inputs used by domestic manufacturers such as steel and aluminum—and Kentucky has a major metals sector.

Significant increases in tariffs across a wide range of imports could contribute to another round of inflation. Countries targeted for U.S. tariffs will likely impose retaliatory tariffs on the importation of U.S. goods to their countries.

“Exports originating from Kentucky account for approximately 14% of the state’s GDP compared to only 12% for the U.S.  Since Kentucky is a major exporter of goods, any retaliatory taxes could reduce demand for Kentucky’s exporters.

Korzenik at Fifth Third also cites immigration and tariff policy as potentially disruptive.

“Tariffs add to inflation; we believe that these will likely be tightly targeted and as such, the negative impact will be limited. But widespread taxes on imports would threaten the economy through unexpected inflation and consequently, higher interest rates,” he said. “To our thinking, the greater economic risk comes from immigration policy shifts. Our economy has become unusually reliant upon foreign-born workers.”