Illinois' economy will underperform those of the Midwest and the U.S. over the next year, due largely to the effects of federal policies, according to Illinois' Commission on Government Forecasting and Accountability (CGFA), which on Monday released an economic forecast prepared by Moody's Analytics.
The commission has relied on Moody's for this annual report dating back to at least 2006, said Clayton Klenke, executive director of CGFA.
The report is mandated by CGFA's enabling statute, Klenke said by email.
"We use Moody's for this report because we also contract with them for other economic data and since they have access to national, regional and state geographical area data, they are a natural fit to compile this report," he said.
Among the report's findings: Illinois' economy weakened in the second half of 2025. Chicago is faring better than the rest of the state, with central Illinois cities — such as Decatur, Peoria and Bloomington — struggling economically, along with Quad Cities on the state's western border.
Retail, manufacturing and business services are doing especially poorly. Fiscal problems, such as the state's pension obligations and shrinking tax base, will hinder future economic growth, according to Moody's.
Trump administration trade policies have hobbled manufacturing-dependent parts of Illinois, and uncertainty around trade policy will be a drag on Illinois' growth, according to the report.
Statewide, Illinois will suffer from the combined effects of federal layoffs, deportations, cuts to entitlement spending and tariffs, Moody's said.
The Trump administration's tax and spending bill will cause an above-average decline in federal healthcare spending in Illinois, the report notes.
"States like Illinois that elected to expand Medicaid under the Affordable Care Act are now exposed to cuts to subsidies," Sarah Crane, director of economic research at Moody's, said by email. "The more generous the benefits, the larger the cuts will be over time and it is natural to expect them to be more impactful in poorer areas."
Cuts to Supplemental Nutrition Assistance Program funds also threaten the social safety net.
"Moody's Analytics estimates that President Trump's policies will create a net drag on economic growth through the end of his second term," the report says, adding, any benefits from the One Big Beautiful Bill Act will be "almost entirely overshadowed by the uncertainty and the margin-squeezing effects of tariffs."
Agriculture has been in a recession for the last several years. Farm income has plummeted in Illinois beyond the drop in the Midwest and the nation; in 2025, reacting to U.S. tariffs, China boycotted U.S. soybeans. That worsened the soybean glut, pushing prices down and exacerbating farmers' losses.
Previous advantages of Illinois, like comparatively low energy costs, are starting to evaporate and are no longer offsetting the costs of taxes, which are the highest in the Midwest, Moody's said.
The report predicts Illinois will "continue to diversify into service-providing industries while nurturing its more efficient and smaller traditional manufacturing core." But it also warns that household employment has flattened and said "Illinois' economy is in a precarious spot behind the region and the nation."
Payroll employment will be essentially flat from Q4 2025 to Q4 2026, while the nation will see 0.3% growth. Household employment will decline, pushing the state's unemployment rate to 5.2% by year's end, higher than both the regional and U.S. rates.
While Chicago will see decelerating growth over the next year, it will stay stronger than other parts of the state, according to the report.
Crane said tariffs are causing problems for businesses across the state, but "Chicago has outperformed most other Illinois metro areas in the past year," she said. "Manufacturing-dependent economies, such as Peoria and Decatur, were already expected to underperform the rest of Illinois before the administration's trade policies took effect, but the tariffs accelerated their slowdowns."
The same is true of agricultural economies, Crane added.
"Chicago will continue to develop as the transportation and distribution center for the Midwest and will increasingly cultivate its tech industry," the report noted.
Champaign-Urbana has seen "sluggish" economic conditions and state budget challenges "could jeopardize higher-education funding and lead to belt-tightening" at the state's flagship university located in that area, the report warned.
"At the federal level, efforts to cut research funding could reduce the size of graduate programs, while stricter immigration enforcement could deter international students from studying at the university, reducing the need for faculty and staff," Moody's added.
The Moody's Analytics Index of Relative Business Costs shows costs are higher in Illinois than nationally and those costs have been ticking up for the past decade. While Illinois has lower business costs than Michigan, Minnesota and Wisconsin, it is more expensive than Indiana, Iowa, Missouri and Ohio.
"Illinois has what it needs to remain a top business center, if it can solve the problems that are eroding its edge in the competition for talent, jobs and capital," Moody's said.
