Between statehood and the Civil War, Kentucky was one of the preeminent agricultural states, partly because of good access to river transportation down the Ohio and the Mississippi to southern markets. Coal mining had become an important part of the economy by the late 19th century. Although agriculture is still important in Kentucky, manufacturing has grown rapidly since World War II and was, by the mid-1980s, the most important sector of the economy as a source of both employment and personal income. Kentucky leads the nation in the production of bituminous coal and whiskey (distilling half of the nation's total in 1996), and ranks 2nd in tobacco output.
In contrast to the generally prosperous Bluegrass area and the growing industrial cities, eastern Kentucky, highly dependent on coal mining, has long been one of the poorest regions in the US. Beginning in the early 1960s, both the state and federal governments undertook programs to combat poverty in Appalachian Kentucky. Personal income is much lower, and unemployment higher, than in the rest of the state. In 1997, 38 of the 49 Appalachian counties received Local Government Economic Development Fund (LGEDF) aid from the coal severance tax. The Kentucky Rural Development Act, covering all 49 Appalachian counties, gives liberal tax incentives to new manufacturing start-ups in those areas that have had higher unemployment rates than the state during the previous five years, or a have current rate that is at least twice the state average. During the 1990s, declines in Kentucky's traditional sectors—tobacco, textiles, apparel and coal mining—was compensated for by job growth in motor vehicle manufacturing, fabricated metals, appliances and other durable goods. The establishment of a major UPS hub in Kentucky plus growth in agricultural research and commercialization activity helped further the state's economic transformation. Manufactures reached more than 27.5% of gross state product by 1998, when overall growth reached 6%. Growth in 1999 and 2000 averaged 4.35%, and then dropped to 2.6% in 2001 in the context of the national recession an slowdown. Manufacturing output, which had grown 10.6% from 1997 to 2000, fell 1.9% in 2001, and to 25.2% as a percent of total state output. In 2002, job losses in manufacturing slowed while employment in service-producing sectors strengthened. Kentucky was one of only five states where employment grew more than 1% in 2002.
Kentucky's gross state product in 2001 was 26th largest among the states at $120.3 billion, to which manufacturing contributed $30.3 billion; general services, $20.1 billion; trade, $18.3 billion; government, $16.6 billion, financial services, $14.2 billion; transportation and public utilities, $9.9 billion; and construction $5.6 billion. The public sector constituted 13.8% of gross state product in 2001.