Prospects for a Rural Recovery

[imgbelt img=Kansasmap.jpg]Rural America has fared better than the cities in most parts of the country, according to Federal Reserve Bank of Kansas City officer Jason Henderson. That doesn’t mean there aren’t challenges ahead.


Prospects for a Rural Recovery.”

Despite the mounting job losses, rural communities across a large cross section of the country have been able to outperform their metro counterparts. In regions west of the Mississippi River and in the New England/Middle Atlantic region, rural communities have sustained fewer job losses than neighboring metro communities. In the West South Central Region (Texas, Oklahoma, Arkansas, and Louisiana), rural communities posted much stronger job gains than in the region’s metro areas since the start of the recession. 

The relative strength of the rural economy has been fueled in part by its large concentration of commodity-based industries. The spike in commodity prices during the first half of 2008 set the stage for robust rural economic growth in many areas. Rising commodity prices also spurred economic gains in farm-dependent regions, as farmers increased their purchases of goods and services. Energy and mining-dependent regions also enjoyed stronger economic gains, as energy companies increased production, boosting the demand for energy-related goods and services. 


The housing crisis was also less severe in most rural areas. The earlier boom in rural housing, in terms of over-building and rising prices, was smaller than across the nation. Moreover, rural areas had less exposure to subprime loans and foreclosures.

Consequently, rural home prices have dropped less than in metro areas. According to the Federal Housing Finance Agency (FHFA), rural home prices, unlike metro home prices, remained above year-ago levels through most of 2008. By the second quarter of 2009, rural prices were still only 1.6 percent below year-ago levels, compared to 5.9 percent below in metro areas. 


The financial market turmoil was also blunted in rural economies.   Structural differences between rural and metro financial service industries gave rural areas less exposure to investment bank activities. For example, securities, commodity contracts, and investments accounted for less than 10 percent of earnings at rural financial institutions, compared to a third for metro institutions. 

Until the financial crisis spread beyond Wall Street, rural financial service firms avoided the high losses of jobs suffered in metro areas. Agricultural banks (predominantly smaller commercial banks in rural communities) continue to post a stronger return on assets than other commercial banks. According to the Federal Deposit Insurance Corporation (FDIC), return on assets at rural agricultural banks reached 0.79 percent in the second quarter of 2009, compared to -0.12 percent for commercial banks as a whole.

Consolidation is a second structural challenge facing rural communities. Historically, rising fixed costs and economies of scale in agriculture drove farms to consolidate into larger enterprises. At first, consolidation freed local labor for smaller nonfarm enterprises in rural communities, but it also freed local labor to migrate out of rural America. Over time, the drive for efficiency and economies of scale in industrialized commodity industries also led to consolidation in rural nonfarm enterprises. But rural communities struggle to provide the support network of industries that larger enterprises need to succeed…. 

Recent policy developments have touted using entrepreneurship and innovation to counteract the trends of consolidation and rebuild the competitiveness of rural economies. A growing body of research documents the economic benefits that flow to small rural communities from entrepreneurship and innovation. The recession has likely exacerbated the structural challenges that entrepreneurship policy was designed to address.  Thus, entrepreneurship and innovation may become even more important to the economic revitalization of rural America.

Access to financial capital is a third structural challenge for rural communities. Entrepreneurs need access to financial capital to fund the innovations and investments critical to building strong, viable rural businesses. Traditionally, rural community banks have been the primary source of capital to rural businesses. Over the past decade, as nonbank financial markets developed, the growth of core deposits at commercial banks slowed.  To finance their loans, many banks tapped higher-cost wholesale market funds.

Surprisingly, the financial crisis has actually increased the level of core deposits in rural community banks.  But is this level sustainable? As investors have searched for safe haven investments, they have placed money in FDIC insured accounts at commercial banks. As a result, domestic deposits have risen 3.0 percent over the past year. Rural bankers continue to report they have funds available for loans that meet qualification standards.


A rural recovery hinges on a rebound in the demand for rural products and services. While the prospects of robust domestic demand could be limited by a jobless recovery, stronger foreign growth could spur rural export activity. Rural businesses will need to focus on producing goods and services targeted to meet the tastes and preferences of global consumers. 

But as rural economies emerge from the “Great Recession,” they still face the persistent challenges of outmigration, consolidation, and access to financial capital. The continued focus on entrepreneurship, innovation, and amenity-based growth could help revitalize rural communities.