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, which will create a downdraft in the economy in the coming months.

According to a new quarterly report from CoBank, 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, which is well above the Federal Reserve’s 2% target and indicates 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 demand for labor is preventing the economy from cooling too quickly. However, corporate profits are falling from their lofty levels during the first few years of the COVID-19 pandemic, which portends hiring weakness in coming quarters.

“Several indicators point to an oncoming recession, with inverted bond yields being the most closely watched,” Dan Kowalski, vice president of CoBank’s Knowledge Exchange, said. “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 experienced 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 internet prevent many of these areas from sharing in the prosperity experienced by other rural counties.

Grains, Farm Supply and Biofuels

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 the USDA’s projections. Soybean oil was the standout losing agriculture 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 experienced 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.

Ethanol production and profitability were in line with long-term averages during the first quarter, as lower corn and natural gas costs helped margins. On the policy front, legislation reintroduced in the U.S. Senate could support higher blends of ethanol. If enacted into law, this legislation will mandate automobile manufacturers to design vehicles that use cleaner fuels and fuel retailers to offer higher-octane options. As reported in January, renewable diesel production surpassed biodiesel production for the first time in November 2022.

Power, Water and Communications

U.S. natural gas futures prices have fallen sharply since the start of the year, with 2023 setting up to be one of the most bearish years in recent history. End-of-winter inventories are well above average and the upward momentum in production suggests the industry will be well stocked ahead of the next heating season. While the U.S. can already boast of having more LNG export capacity than any other producing nation, the country’s liquefied natural gas shipping armada is about to get bigger, potentially doubling in size.

Several publicly traded broadband operators have reduced their 2023 fiber network expansion plans. Higher interest rates, increased costs for labor and materials, and increased competition are among the main reasons for the cutbacks. Rural operators are also experiencing a slowdown, as they face many of the same issues as urban and suburban operators. Despite the near-term slowdown in network builds, investor interest in the market has not waned. The reality is consumers are increasingly reliant on fiber networks, which means the U.S. economy is too.