CoBank Quarterly: Resilient Labor Market Delays Inevitable U.S. Economic Slowdown

DENVER (April 6, 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.

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 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.

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, the act 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. 

Animal Protein and Dairy

Cattle markets ended the first quarter in a strong position. Fed cattle traded above $165/cwt and feeder cattle above $190/cwt during the quarter. Consumer demand for beef over the past three years has been nothing short of remarkable, but resistance to higher prices has recently surfaced. The choice boxed beef cutout tumbled more than $20 during January. With packer margins pressured by stronger cattle prices and weaker cutout values, production has eased lower.

Hog prices were relatively flat through much of the quarter, missing out on their normal seasonal momentum. Through the end of March, cumulative weekly slaughter is up about 3% year-over-year. However, the industry appears to be drawing down future availability which should lead to higher prices later in the year. U.S. pork exports came under pressure in 2022, but the trade picture appears to be improving. In January, year-over-year exports increased to Mexico by 5% and to China by 37%.

Chicken producers had a difficult start to 2023 after wholesale breast meat prices hit rock-bottom levels late last year. But things are looking up for the sector as prices have increased and beef production comes under pressure. U.S. broiler meat exports reached 630 million pounds during January, a record high for the month and a 13% increase year-over-year. Domestic dark meat support remains robust as well, helping to carry the burden of less-than-stellar conditions for white meat.

Milk prices are succumbing to additional milk supply with the seasonal pressures of the spring flush combined with an additional 12,000 cows added to the U.S. herd in February. The increased milk supply, combined with ongoing weak domestic demand, pushed down All Milk prices earlier in the quarter with spot milk selling at a significant discount to Class pricing. Cheese manufacturers are producing a record amount of cheese as milk supply builds. The export pace for all dairy products remains robust, with January shipments tallying 466.1 million pounds – a record for the month.

Cotton, Rice and Specialty Crops 

The deteriorating global economic outlook is weighing heavily on cotton markets. Global cotton consumption is forecast to drop 11% between marketing years 2020/2021 and 2022/2023. That would be among the worst performances in the last 10 years. Clothing inventories are still too high for retailer preferences, while disposable income growth rates in developed economies continue to be stagnant. Lackluster demand for cotton seems inevitable. 

Rough rice prices fell last quarter under the pressure of speculative selling. U.S. rice exports continue to lag far behind last year’s pace, with accumulated shipments for the current marketing year down 40%. The strong dollar and India’s increased exports remain headwinds for the U.S. Indian exports are forecast to climb to a new high as India’s government has dramatically increased subsidies to rice farmers. 

The U.S. sugar industry is anticipating strong prices and record production. Production estimates continue to edge higher, spurred by decade-high recovery rates for beet sugar and increasing sugarcane acreage. At the same time, prices remain historically high as food manufacturers hold inventories at the bare minimum. The cane sugar manufacturing Producer Price Index is up about 37% from pre-pandemic levels. But wholesale spot cane sugar prices have risen by 82% over the same time, which suggests fairly strong margins for sugar refiners.

Rain and cold temperatures during much of March’s almond bloom and pollination period has raised concerns over 2023 yields. However, a short crop may not be a bad thing for the almond industry as inventories have ballooned in recent years. Domestic and export demand fundamentals are currently weak, and it will take another season at least to bring almond inventories back to more manageable levels. Meanwhile, the heavy rains in California have left many of the state’s strawberry fields under water. Strawberry prices will be sky high in the coming months as a result. 

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.

Read The Quarterly. Each CoBank Quarterly provides updates and an outlook for the Macro Economy and U.S. Agricultural Markets; Grains, Biofuels and Farm Supply; Animal Protein; Dairy; Cotton and Rice; Specialty Crops and Rural Infrastructure Industries.

About CoBank

CoBank is a cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 76,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.