Resilient Labor Market Delays Inevitable U.S. Economic Slowdown

USAgNet - 04/10/2023

Turmoil in the commercial banking sector over the past month has created a new and unpredictable variable in the U.S. economic outlook. For now, the situation appears to be contained and the economic impacts have been relatively modest. But as lending standards and credit availability tighten for smaller banks, small businesses and consumers will have fewer funding sources. That will create a downdraft in the economy in the coming months.

According to a new quarterly report from CoBank’s Knowledge Exchange, inflation remains the biggest economic challenge ahead. Even as general inflation moves in the right direction, headline inflation is still at 5% year-over-year. That’s well above the Federal Reserve’s 2% target and points to the likelihood the Fed will raise rates again in May.

Gains in disposable personal income are powering consumer spending, although the pace of growth is slowing. The job market remains strong, and that demand for labor is preventing the economy from cooling too quickly. However, corporate profits are falling from their lofty levels during the pandemic, which portends hiring weakness in coming quarters.

“Several indicators point to an oncoming recession, with inverted bond yields being the most closely watched,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange. “But predicting the timing of that slowdown has been particularly tricky in the face of a resilient labor market. We still expect a shallow, relatively short recession in 2023, but probably not before late in the third quarter or into the fourth.”

New data from the U.S. Census Bureau shows the pandemic-era trend of outmigration from large population centers is slowing but not reversing. Rural areas saw a second consecutive year of population growth in 2022.

However, the benefit of population inflow is not spread equally in rural America. More than 60% of counties with populations under 10,000 lost residents last year. These counties tend to be geographically isolated and less adequately resourced. And the lack of amenities like high-speed broadband prevent many of these areas from sharing in the prosperity experienced by other rural counties.

Grain prices finished the quarter down modestly after a roller coaster ride spurred by the ongoing war in Ukraine, lower corn and soybean production in Argentina and a weakening global economic outlook. The drop in U.S. corn prices spurred a Chinese buying spree, helping to close the gap between actual accumulated exports and USDA’s projections. Soybean oil was the standout losing ag commodity in the first quarter, dropping 20% and continuing a precipitous fall that began in December 2022.

Fertilizer prices continued to fall amid downward pressure on commodity and energy prices. Nitrogen prices may be nearing a low point for 2023, as higher natural gas prices are forecasted by summer. Farm supply cooperatives saw muted agronomic activity in the first quarter due to substantial rain and snowfall in March, which has limited field work and other pre-planting activities. But the outlook for the sector is generally favorable this year following a year of record profits in 2022.

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