Prospects for a Rural Recovery

Over the course of the recent recession, rural economies have held up better than their metro peers, thanks to strong rural economic gains early in the downturn. Even so since 2007 rural communities have endured the steepest and longest economic contraction since the Great Depression.

Stronger demand and exports can reverse the cyclical downturns experienced during the recession. But many of the long-term structural challenges facing rural America remain: Out-migration is growing, industries are consolidating, and access to financial capital remains tight. In short, the long term health of rural America in the 21st century will rest on developing policies that focus on amenity-based development, entrepreneurship, and innovation.

Rural economies face long term structural challenges to rural prosperity. Going forward, the continued focus on entrepreneurship, innovation and amenities driven growth can help offset these challenges. Out migration has been a persistent challenge for rural America. A substantial portion of the Baby Boom generation and Gen Xers typically left rural communities for urban areas after graduating from high school and college. In the Kansas City Federal Reserve District, though, trends are showing that middle-aged families are returning to rural communities. People still move to places with job opportunities, but research is finding that people are increasing relocating to communities that offer a high quality of life. While a robust business environment is crucial, so is a community's ability to offer personal consumption amenities, such as education and health services, personal services, and recreational amenities.

Consolidation is a second structural challenge facing rural communities. Historically, 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. Recent policy developments have touted using entrepreneurship and innovation to counteract the trends of consolidation and rebuild the competitiveness or rural economies.

A growing body of research documents the economic benefits that flow to small rural communities from entrepreneurship and innovation.. The recession has 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. But will these funds remain in rural commercial banks as economic and financial conditions improve? As the risks in financial markets abate, investors may pull money out of "safe haven" accounts in search of higher returns.

Source: Main Street Economist, Jason Henderson, Issue V, 2009