After experiencing negative fallout from drought conditions over the last three months, the rural U.S. economy soared higher, according to the October survey of bank CEOs in a 10-state area. In fact, The Rural Mainstreet Index (RMI), which ranges between 0 and 100 with 50.0 representing growth neutral, rose to a solid 56.6 from September’s weak 48.3. 

For the first time since June, RMI rose above growth neutral, says Ernie Goss, the Jack A. MacAllister chair in regional economics at Creighton University in Omaha, NE. “Our survey indicates the negative impacts of the drought are being more than offset by the positives of very strong incomes from high agriculture and energy prices,” he says.

Looking ahead, however, rural bankers are uncertain about 2013 and beyond. Bankers were asked whether they expect the U.S. to suffer an economic recession in 2013, and 25% think a recession is likely or very likely next year. Conversely, 30.8% think a 2013 recession is unlikely, or very unlikely.

The November elections are seen as very important for some in terms of clouding the outlook.“Forecasting how things will look in 2013, especially business owner sentiment, will depend greatly on what happens on the first Tuesday of November,” says Casey Regan, CEO of Premier Bank in Farmington, MN.

Meanwhile, Dale Bradley, CEO of The Citizens State Bank in Miltonvale, KS, echoed concerns of many other bankers about the potentially large impact of the record tax increase slated to go into effect on Jan. 1, 2013 and its negative impact on the economy.

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There also are concerns about the U.S. economy. “U.S. economic competitiveness is in decline. Since 2009, the U.S. ranking has dropped from 15th to 19th among the 144 nations evaluated by the Fraser Institute. The primary factor damaging the U.S. ranking is the escalating size of the federal government, with U.S. federal spending as a percent of the nation's gross domestic product (GDP) climbing from 21.8% in 2008 to 24.1% in 2012,” Goss says.

“Moreover, between 2008 and 2012, overall private employment declined by 2.5%, while federal employment increased by 1.2%. As the size of the federal government rose, the national debt soared from $9.4 trillion in 2008 to $15.9 trillion in 2012, advancing by about 70% as the overall economy expanded by only 9%,” he says.  

Here’s a look at the results of the October RMI survey:

Farming: The farmland-price index (FPI) soared higher, climbing to 71.7 in October, the highest level since March of this year, from September’s 61.6. This is the 33rd consecutive month that FPI has risen above growth neutral.

“Except for a brief period this summer, farmland prices have expanded at a pace that, in my judgment, depends too heavily on high agriculture commodity prices and record low interest rates. The farm-equipment-sales index expanded to 60.5, its highest level since May of this year, and was up dramatically from September’s growth neutral 50.0,” Goss says.

Crop yields are down across the region with almost 70% of bankers indicating that 2012 yields will be lower than in 2011. Approximately 18.8% of bank leaders are reporting 2012 yields up from last year.

Banking: After expanding for seven straight months, loan demand unexpectedly plummeted in October. The loan-volume index sank to 44.2 from September’s 70.2. The checking-deposit index advanced to 66.7 from September’s 48.3, while the index for certificates of deposit and other savings instruments rose to an anemic 42.0 from 38.4 in September. “The 2012 drought failed to increase the demand for loans from farming and nonfarming organizations in the region,” Goss says. 

Hiring: October’s new hiring index (NHI) expanded to a tepid 51.5 from 50.9 in September. “Hiring for rural mainstreet businesses is growing but at a snail’s pace. Bankers report that uncertainty surrounding healthcare reform, the elections and the ‘fiscal cliff’ are restraining hiring even as the economy expands,” according to Goss.

Confidence: The confidence index, which reflects expectations for the economy six months out, increased to 50.7 from September’s 43.0. “As the rural mainstreet economy turned upward for the month, so did bankers’ outlook. The turnaround in the housing market is an important factor boosting economic confidence,” Goss adds.

Home and retail sales: The October home-sales index advanced to a healthy 59.8 from September’s 58.8. The October retail-sales index increased to a still weak 48.6 from 42.9 in September. “As in the national economy, the rural mainstreet housing market is improving. On the other hand, the drought appears to be having negative impacts on retail buying,” Goss says.

Despite the upturn in the rural mainstreet economy and rising confidence, bank CEOs expect holiday sales to grow by only 2.3% from last year. More than one-fourth of the bankers, or 27.9%, expect either no change or a downturn in retail sales from last year.