2007 Was Good For The Rural Economy, KC Fed Reports
2007 was relatively good for the rural economy, as rising prices for oil, gas, coal and ag products propelled those industries. Wages for rural jobs rose more than for jobs in the cities.
The Main Street of Wood River, Illinois. "I grew up in this town and the main street looks remarkably similar to how I remember," writes photographer Jim Frazier.
"The rural economy was strong in 2007," reports the Kansas City Federal Reserve Bank in a recent paper. 2008….well, that might be a little more dicey.
Defining the rural economy is a problem. There are really dozens of rural economies, and this Federal Reserve report does a good job of talking about more than just agriculture (the occupation of only about ten percent of rural workers).
The Fed report steps through the various components of the rural economy, from agriculture to Main Street retail to energy production. We'll follow along with their analysis, looking at the results from 2007 and the prospects for 2008.
Farms produced record incomes in 2007, a result that wasn't expected when the year began. The U.S. Department of Agriculture's prediction at the beginning of last year was that net farm income would rise to $66.5 billion. By November, USDA had raised that estimate to $87.5 billion, 47.6 percent above 2006.
What happened? The drought abated, so wheat production rose 14 percent. (Wheat production worldwide was only up 1.2 percent in '07, leading in part to the crisis in food availability.) Soybean production was down 18.6 percent, due to a dry August. Higher grain prices caused the cost of raising livestock to soar and margins in that area are now "razor thin," according to the Fed.
Farmers used their increased income to buy new equipment — and land. Demand for farm loans increased in 2007, as did spending on equipment. During the first eleven months of 2007, combine and tractor sales rose 15.6 percent and 21.6 percent over 2006. The biggest sales of equipment came after the fall 2007 harvest.
The Fed found that rural Main Street businesses "added jobs at a modest pace in 2007." Overall job growth slowed to an annual average growth rate of .4 percent through November — and the slowing of job growth in rural communities was dramatic in the third quarter.
The rural unemployment rate was 4.6 percent in November 2007. The writers of the report, Jason Henderson and Maria Akers, said there was anecdotal evidence that rural employers were having a hard time finding high skilled workers, such as engineers, computer geeks, welders, etc.,. Rural wages rose 3.1 percent in 2006 and average weekly earnings were up 4.4 percent in November 2007 over the year before.
Education and healthcare are the largest rural employers and they added the most jobs to the rural economy in 2007. Earnings were flat in these sectors, but employment was up over 3 percent.
There was "solid job expansion" in the professions and business services (accountants, lawyers, engineers), according to the report.
Rural retail jobs declined, down by 5 percent in 2007, but there was an increase in tourism employment.
Manufacturers shed workers. Rural manufacturing jobs declined about 2.5 percent, double the decline in urban areas.
For the second year in a row, rural weekly earnings increased faster than weekly earnings in the metros.
"Natural resource industries, especially mining and energy, were the biggest engines of nonfarm growth for rural America in 2007," according to Henderson and Akers. Higher oil prices revived the domestic drilling industry. And average weekly earnings in the rural mining sector jumped 35 percent.
The number of megawatts generated from wind power increased 25 percent in 2007.
The housing slump so evident in some urban areas spread to rural America, but with a more modest impact. In the first ten months of the year, rural housing permits were down by a third. In urban American, permits were off by 50 percent.
Construction jobs didn't decline in rural communities, however, and, in fact, builders added jobs. "Some of the bigger gains emerged in the Midwest, where agricultural construction projects ranged from building ethanol plants to erecting grain storage facilities," the report states.
Profits for ethanol plants dropped in late 2007 and several plants were put on hold late in the year. One open question, according to Akers and Henderson, is who will control the industry. Record profits in 2006 brought the large processors into the ethanol game, firms such as ADM and Cargill. "As a result, in 2006 and 2007, only 11 percent of new ethanol plants were farmer-owned, down from roughly 70 percent in prior years," Henderson and Akers report. "While increased ethanol mandates may support additional growth in the ethanol industry, the economic structure of the ethanol industry in the future may become less concentrated in farmer-owned facilities."
Higher energy costs will impact everyone. Rural manufacturers are facing fuel surcharges for deliveries. Farmers are seeing their expenses surge, rising 9.3 percent in 2007, the largest increase since 1979. Feed, fertilize, chemical and fuel prices are all rising.
Livestock producers were operating in the red early this year. "Heading into 2008, the livestock sector is struggling in the face of higher feed costs," according to the authors.
The housing slump remains largely a city phenomenon, with roughly 90 percent of all subprime loans and foreclosures located in urban America. "As a result, housing weakness could have a less severe impact on rural America's economy than that of the nation," according to the report. (The one exception might be resort counties, where home prices have jumped in recent years.)
A weakening dollar could stimulate exports of both rural manufacturers and farmers. Midwestern manufacturers saw the greatest increase in exports last year.
Tourism industries remained steady, despite rising fuel costs. But rural households spend more than their urban counterparts on gasoline, 22 percent more in 2006, so an increasing proportion of the rural paycheck will go to fueling the family vehicle.
Still, Henderson and Akers report that the "rural economy in 2008 is poised for another year of economic gains."