Rural versus Urban Economies: Trade and Fed Policy Divide the Two

Just as the drunk with one hand in the fireplace and the other in the refrigerator is, on average, doing well, the agricultural and energy dependent states have been, on average, doing (performing) well. Currently however, state averages blend healthy growth in urban areas in each state with economic fatigue in the rural areas of the same states.

Between 2009 and 2013, Creighton's Rural Mainstreet survey typically indicated very healthy growth in rural areas that are dependent on agriculture and energy. During this time period, driven by the Federal Reserve's easy money policies that stimulated agriculture and energy exports, our surveys and government data tracked rural areas growing at brisk rates. During the Fed's expansion policies from 2009 to 2013, average yearly export growth in agriculture, food and oil products soared by 12.6%.

In 2014, the Fed ended Quantitative Easing, one of its major stimulus programs, which lowered long-term interest rates, and in 2015 began raising short-term interest rates. The end of the Fed interest rate stimulation programs, or easy money policies, raised the value of the U.S. dollar and restrained exports, particularly of agriculture and energy commodities. Thus, urban areas of the region, more dependent on manufacturing and housing, continued to expand while rural areas relying on agriculture and energy moved into negative territory.

During the Fed's less accommodative money polices, 2014-17, the average yearly export sales of agriculture, food, and oil products plummeted by 6.3%. As a result, employment in urban areas of the region over the past three years expanded by 4.1%, while employment in rural areas of the same states contracted by 0.3%.

The current trade skirmish/war has the potential to widen the economic performance gap between rural and urban areas. China's retaliatory tariffs on $34 billion worth of U.S. goods are directly aimed at rural regions of the nation that produce soybeans, cotton, rice, sorghum, beef, pork, dairy, nuts and produce. Not surprisingly, soybean prices have tumbled by $2 per bushel over the past week. Other ag commodity prices are under downward pressures.

Historically, the first casualty of a trade war is agriculture, and agriculturally dependent areas of the nation.
Ernie Goss