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Rising Interest Rates, Lower Oil Prices Emerge as Potential Tests for Regional Banks, Says Dallas Fed

ADP data provide early estimates of Texas job growth, China’s weakening economy impacting Texas exports, says new issue of Southwest Economy
DALLAS—Although community banks in the Eleventh Federal Reserve District prospered in 2014 and institutions overall appear well-positioned financially, challenges loom, according to the latest issue of the Federal Reserve Bank of Dallas’ Southwest Economy.

They include rising interest rates and, particularly for Texas banks, the effects of the oil price decline, write financial industry analyst Kelly Klemme and business economist Ed Skelton in “Robust Regional Banking Sector Faces New Economic Hurdles.”

The authors note that when interest rates rise, banks’ funding costs could increase at a time when interest income remains stagnant, squeezing profitability.

While the state’s economy has become more diverse and thus less reliant on the oil and gas industry, the sector’s price drop has still negatively affected the Texas economy and labor market, according to the authors.
Some pockets of the state remain heavily dependent on the energy sector, making local industries vulnerable to spillover effects, the authors write. Because of community banks’ close ties to the areas they serve, they are more exposed than large banks, the authors note.

In “ADP Payroll Processing Data Can Provide Early Look at Texas Job Growth,” economist Keith R. Phillips and research analyst Christopher Slijk explain how estimates of private sector employment from Automatic Data Processing Inc. (ADP) can provide preliminary estimates of Texas job growth.
The authors say that arriving at an estimate of private sector job growth 10 days sooner than the official employment data—as the ADP data do—is useful for analysts who track the economy and to businesses that plan for labor and capital changes.

In Texas, private employment represents 84.2 percent of total nonfarm jobs. Since ADP began tracking this data in January 2005, the seasonally adjusted series has moved closely with official estimates of Texas private sector employment, the authors write.

In this issue’s Spotlight article, economic analyst Jack Wang looks at the impact of China’s weakening economy on Texas exports. China is Texas’ fourth-largest export destination but first in terms of export growth.
The relationship between Texas exports and the Chinese manufacturing Purchasing Managers Index (PMI) provides a way to quantify the impact of a decelerating Chinese economy.

The article points out that the drop in the Chinese PMI in first quarter 2015 would imply about a $23 million impact on Texas exports to China.
This issue of Southwest Economy also includes a conversation with Colin Woodall, senior vice president of government affairs for the National Cattlemen Beef Association, on “Trade Advocates, Cattlemen Have Beef with Meat Labeling Rules.”

Under the federal Country of Origin Labeling (COOL) program, beef must be labeled with the locations where the animal from which the beef was processed was born, raised and slaughtered, according to Woodall.

The rules, which also cover fruits, vegetables and nuts, are designed to provide consumers added information, but have failed as a branding or promotion tool, Woodall says.

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Media contact:
Justin Jones
Federal Reserve Bank of Dallas
Phone: 214-922-5449
Email: Justin.Jones@dal.frb.org