Jason R. Henderson

English

Research Papers in Economics

January 2002
As the U.S. economy slipped into recession in 2001, an
already lackluster rural economy lost even more steam. Since
1995, job growth in rural areas has trailed growth in metro
areas. But in the wake of last year’s terrorist attacks, national
recession, and falling food demand, job rolls in many parts
of rural America have not only slowed but contracted.
Meanwhile, commodity prices have only recently begun to
turn around. As a result, farm incomes continue to rely on
large payments from Uncle Sam.
With the U.S. economy now in recession, the demand for
most rural products—farm and nonfarm alike—has stalled.
Many economic analysts expect the U.S. economy to turn
around in 2002. But, are the prospects of a rural recovery as
bright as the rest of the nation? Are both the Main Street and
farm segments of the rural economy positioned to recover?
CENTER FOR THE STUDY OF RURAL AMERICA
Federal Reserve Bank of Kansas City
Will the Rural Economy
Rebound with the
Rest of the Nation?
Jason R. Henderson
Economist
Center for the Study of Rural America
Commentary on the rural economy
The Main Street 
Economist
A complete discussion of the outlook for the rural economy will appear in the first
quarter 2002 issue of the bank’s Economic Review.
Jan Newsletter 2002  2/13/02  2:34 PM  Page 2The Main Street Economist January 2002
A Main Street recession in 2001
The terrorist attacks of September
11 deepened the recession in the U.S.
economy, and the Main Street economy
followed suit. The manufacturing sector,
which limped into 2001, slumped through-
out the year. Service activity, while healthy,
was not strong enough to keep Main Streets
out of a recession. 
Entering 2001, rural manufacturers
were already finding it hard to maintain job
rolls. In fact, job rolls in rural factories
shrank throughout the year and by
September 11 rural manufacturing jobs
were 5.5% below a year earlier (Chart 1).
After the terrorist attacks, layoff announce-
ments only intensified the contraction in
manufacturing activity.
As rural manufacturing contracted,
other rural economic activity slowed.
Service industries, which account for the
largest share of rural jobs, entered the year
adding jobs at a 4% clip. By October, that
growth rate had been cut in half. As early as
April, merchants, which account for the
second largest portion of rural jobs, were
struggling to keep jobs at year-ago levels.
Despite lower interest rates, construction
activity also slowed in 2001. Slowing activ-
ity led to sliding construction job gains
throughout the year. 
Shrinking demand for rural products
and services left the Main Street economy
struggling to maintain job levels of a year
ago. In October, employment fell to year-
ago levels. As layoff announcements
mounted, the rural nonseasonally adjusted
unemployment rate rose sharply to 4.9% in
October, compared with 4.7% in the nation
as a whole, and layoffs are continuing.
Will Main Streets recover in 2002?
The current downturn on Main Street
follows a history of rural economies travel-
ing the same path as the rest of the nation.
With many analysts expecting a recovery in
the U.S. economy in 2002, Main Street
should also recover in 2002, if history is a
reliable guide.
Many economic analysts forecast an
end to the recession soon after the first
quarter. A consensus
survey of economic
forecasters reported
that the annual rate
of growth in GDP
would turn positive
in the first quarter of
2002 and continue
to grow.1 Over 90%
of these same fore-
casters expect the
recession to end by
June 2002. 
Assuming the
nation’s recovery
materializes, can
rural areas keep pace
with the rest of the nation? Contrary to
expectations, rural areas have actually led
the U.S. out of recession several times in
the past. The Main Street economy actually
grew faster than the nation in three of the
last five recoveries since 1970, the most
recent coming after the 1991 recession. But
the forces that propelled rural economies
into a leadership role in those recessions do
not appear to be in place this time around. 
Rural places paced economic recoveries
in the 1970s and after the 1991 recession.
The twin forces that allowed rural areas to
pace a U.S. recovery from those reces-
sions—stronger service-based activity and a
softer manufacturing slowdown—are cur-
rently missing. Job cuts have been deeper
for rural manufacturers. Rural service firms
are still adding jobs, but the gains are not
as strong as in the last recession and may
not be able to overcome job losses in man-
ufacturing. 
Whether service activity in rural areas
can continue to outpace metro areas is also
open to question. Traditional engines of
rural service growth could potentially face
stiff challenges in the current recession.
Over the past decade, rural locations rich in
natural amenities—particularly lakes,
streams, and mountain vistas—have paced
rural employment growth. These recreation
and retirement destinations continue to
enjoy the fastest rate of employment growth
in the new century. By depending more on
tourist dollars than other rural areas, a slow-
down in travel limits their overall economic
activity. These locations are facing serious
difficulties in the current recession.
Are farms poised to rebound?
While the Main Street economy faced
recession in 2001, the farm economy was
beginning to shake off its recent slump.
Another round of government emergency
payments and higher market receipts for
livestock and crops boosted farm incomes
in 2001, improving the farm balance sheet.
Heading into 2002, food supplies are
expected to shrink, positioning commodity
markets for a possible price rally. The
strength of the rally depends on the U.S. and
global economies emerging from recession to
boost food and agricultural product demand.
Farm income rebounded in 2001 with
another boost from Uncle Sam and higher
market-based incomes (Chart 2). USDA
expects U.S. net farm income, a broad
measure that accounts for inventory swings
and depreciation, to rise 6.5% to $49.4
billion in 2001, its highest level since the
banner year of 1996. Unlike 1996,
however, more than a third of net farm
income in 2001 came from government
payments. Congress passed another round
of emergency payments, bringing the total
to $9.1 billion, slightly higher than the $8.5
billion in 2000. The rise in emergency pay-
ments offset a decline in farm bill payments
- 2 -
-8
-6
-4
-2
0
2
4
6
Oct-01 Jul-01 Apr-01 Jan-01 Oct-00 Jul-00 Apr-00 Jan-00
Manufacturing
Wholesale & retail trade
Services
Construction & mining
Recession start date Mar-01
Percent change from year ago
Chart 1
Rural Job Growth by Industry
Source: Bureau of Labor Statistics
Jan Newsletter 2002  2/13/02  2:34 PM  Page 3emerging from the 1996 farm bill.
Market-based farm income rose to
$29.4 billion, paced by a rebound in live-
stock markets during the first half of the
year. Smaller livestock supplies at the begin-
ning of 2001 boosted prices and led to a 9%
jump in livestock cash receipts. Though not
as strong as livestock, crop receipts managed
a 3% gain to $97 billion in 2001.
Bigger government payments and larger
farm cash receipts supported rising land
values in 2001. The district’s quarterly survey
of farm bankers reported a buoyant 4% gain
in land values during the year ending in
September. Land value gains appeared to
slow throughout the year, though, and the
weaker growth rate may be driven by dimin-
ished nonfarm demand for agricultural land
due to the recession. 
Rising land values and farm income led
to a healthy farm balance sheet as farmers
used income gains to pay off existing debt.
Farm business assets rose almost 3% in
2001, paced by growth in farm real estate
assets. Cheaper borrowing costs due to lower
interest rates and tax incentives to convert
nondeductible personal property to farm
business property pushed up farm debt. Still,
the farm sector debt-to-asset ratio remained
well below historical levels. 
Overall, higher commodity prices and
increased government payments have pro-
duced financial stability in the farm
economy. Debt-to-asset ratios remain low
as rising incomes from slightly higher com-
modity prices and government payments
boosted land values. By the end
of the year, higher supplies and
waning demand from the eco-
nomic recession weighed
heavily on farm commodity
prices. Both smaller supplies
and a recovery in food demand
will probably be needed to
boost prices in 2002.
A potential price rally
in 2002?
Heading into 2002, food
inventories are comparatively
small. Small food supplies leave
the agricultural commodity markets poised
for a potential price rally. But the extent of
that rally will depend on how quickly the
U.S. and global economies emerge from
recession—and how quickly new markets for
farm products develop. 
Lower food supplies position commod-
ity markets for a potential price rally. For the
second straight year, world grain consump-
tion outstripped world production leaving
inventories heading into 2002 well below a
year ago. U.S. beef and pork production are
also expected to drop roughly 4% in the first
half of 2002. 
While commodity markets may be posi-
tioned for a price rally, demand concerns
make a recovery uncertain. Following
September 11, restaurant demand plum-
meted. Export activity has declined with the
growing global recession and Mad Cow
disease fears emerging in Japan. New demand
for nonfood products, such as ethanol, needs
to emerge to help spark a farm recovery.
The immediate impact of the terrorist
attacks on the agricultural economy was the
stoppage of airline travel that brought about
a dramatic decline in restaurant sales. As
people stayed home and businesses cut back
on corporate travel, September restaurant
sales plummeted 9.2%, placing downward
pressure on livestock prices, especially high-
end meats. Although restaurant sales have
rebounded somewhat, they have failed to
return to pre-attack levels. A slow recovery in
restaurant sales could limit domestic food
demand in the year ahead.
In addition to weak domestic demand,
slower export activity, especially to Asia,
could limit the demand for U.S. agricultural
products in the year ahead. Since the second
quarter of 2001, export growth has slowed
dramatically as agricultural exports to Asia,
which account for roughly 40% of U.S.
agricultural exports, fell 3.5% below year-ago
levels in the third quarter. In 2002, export
activity to Asia may not rebound strongly.
The Japanese economy remains especially
weak, and the presence of Mad Cow disease
is limiting Japanese beef consumption,
shrinking the largest market for U.S. agricul-
tural exports. 
With the prospect of lagging food
demand in 2002, new sources of demand for
agricultural products, such as ethanol, may
be needed to boost commodity markets. Last
year, the EPA rejected California’s request to
be waived from federal standards on oxy-
genates in gasoline, thus opening up a whole
new market for U.S. corn. Ethanol produc-
tion jumped 41% in 2001 and is expected to
double by 2005. The additional 1 billion
bushels of corn needed to accommodate the
new capacity will boost demand and help
support prices.
Summary
The U.S. recession spread to a weak
rural economy in 2001, where shrinking
demand for rural products caused a contrac-
tion in rural manufacturing activity. Healthy
service activity has not been strong enough to
boost overall job rolls on Main Street. Falling
demand for farm products limited a rebound
in the farm economy. Despite the recession,
improved market earnings and big govern-
ment payments stabilized farm balance
sheets. Entering 2002, food supplies are com-
paratively lean, setting the stage for a possible
rally in commodity prices.
A full rural rebound, however, will
depend on increasing demand for existing
products and reaching new outlets beyond
traditional food markets.
1 GDP forecasts in this article are based on the Blue
Chip Economic Indicators, Jan. 10, 2002.
The Main Street Economist January 2002
- 3 -
0
10
20
30
40
50
60
2001* 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Billion dollars
Direct gov’t 
payments
Emergency 
assistance
Chart 2
U.S. Net Farm Income
*Forecast
Source: USDA
Jan Newsletter 2002  2/13/02  2:34 PM  Page 4On the Web: www.kc.frb.org
The Main Street Economist January 2002
Survey of Agricultural Credit Conditions
Federal Reserve Bank of Kansas City
September 30, 2001
Highlights from the third quarter survey1
•G ains in district farmland values remained steady in the third quarter of 2001. District cropland values edged up 0.6 % while dis-
trict ranchland values rose 1.1%. Nebraska and Oklahoma posted solid gains in the quarter while gains in the Mountain states lev-
eled off, hinting that nonfarm demand may have slowed with the national economy. Compared to the previous year, district crop-
land and ranchland values are up 4 and 5%, respectively.
•T he district farm commodity price index dropped in the third quarter. Prices for wheat, soybeans, and livestock softened while
corn prices rose. The index, however, remains above year-ago levels, and net farm income is expected to rise above 2000.
•F arm credit conditions revealed a few bright spots. Loan repayment rates rebounded during the quarter, and bankers reported fewer
requests for loan renewals or extensions. In addition, bankers report ample funds available for farm loans and interest rates remain
low. Demand for farm loans, however, was noticeably below the previous two years. 
•F arm interest rates continued to decline in the third quarter. At the end of the quarter, interest rates on new farm loans averaged
8.61% for operating loans, 8.43% for feeder cattle loans, 8.45% for intermediate-term loans, and 7.96% for real estate loans. Since
September, interest rates in national money markets have fallen.
Note: 276 bankers responded to the third quarter survey.
1 Please refer questions to Kendall McDaniel, associate economist, at 816-881-2291 or kendall.l.mcdaniel@kc.frb.org.
Farm Real Estate Values
September 30, 2001
(Average value per acre by reporting banks)
Nonirrigated Irrigated Ranchland
Kansas $653 $1,093 $388
Missouri 999 1,203 659
Nebraska 882 1,465 369
Oklahoma 535 777 384
Mountain states* 361 1,131 249
Tenth District $712 $1,215 $394
Percent change from:
Last quarter+ 0.62 0.57 1.12
Year ago+ 4.01 4.06 5.15
Market high -15.68 -15.65 -3.90
Market low 79.71 78.61 136.14 
*C olorado, New Mexico, and Wyoming combined.
+P ercentage changes are calculated using responses only from
those banks reporting in both the past and the current quarter.
Source: Federal Reserve Bank of Kansas City
Selected Measures of Credit Conditions
at Tenth District Agricultural Banks
Loan Loan Average Loan-to- District
Loan Fund repayment renewals or deposit farm commodity
demand availability rates extensions ratio* price index
(index)+ (index)+ (index)+ (index)+ (percent) (1980=100)
1999
Jan.–Mar. 105 113 56 143 65.7 88.0
Apr.–June 107 107 71 127 66.5 89.9
July–Sept. 103 90 74 126 67.7 89.5
Oct.–Dec. 100 99 86 115 67.7 94.1
2000
Jan.–Mar. 107 95 92 108 67.1 100.6
Apr.–June 112 78 86 108 70.4 99.5
July–Sept. 103 85 84 112 70.8 93.0
Oct.–Dec. 106 90 82 120 70.9 102.6
2001
Jan.–Mar. 111 106 78 123 70.5 105.3
Apr.–June 111 100 76 120 70.4 102.7
July–Sept. 98 116 83 115 71.2 99.7
*A t end of period.
+B ankers responded to each item by indicating whether conditions during the current quarter
were higher than, lower than, or the same as in the year-earlier period. The index numbers
are computed by subtracting the percent of bankers that responded “lower” from the
percent that responded “higher” and adding 100.
Source: Federal Reserve Bank of Kansas City
Jan Newsletter 2002  2/13/02  2:34 PM  Page 1

Will the rural economy rebound with the rest of the nation?

http://www.kansascityfed.org/Publicat/mse/MSE_0102.pdf

Will the rural economy rebound with the rest of the nation?

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Research Papers in Economics