By KEN SWEET, AP Business Author
NEW YORK (AP) — The outlook for the U.S. economy from Wall Street’s biggest banks is getting gloomier, with many top executives saying they’re preparing for a possible downturn or a recession.
Following the short but potent pandemic recession in 2020, many bank CEOs have spent the past yr and a half trumpeting the strength of the U.S. economy and the resilience of the U.S. consumer. Many did so again Friday after reporting their quarterly results, but this time with an overriding sense of caution.
“We recognize the pressure points are constructing in several areas of the economy that may lead to emphasize in the long run,” said Andy Cecere, CEO of U.S. Bank.
Such comments reflect the growing evidence that the U.S. and global economy is weakening within the face of worldwide inflation and the war in Ukraine. On Tuesday, the International Monetary Fund lowered its forecast for 2023 global economic growth to 2.7% from 2.9%.
Political Cartoons
Half a dozen banks reported their quarterly results on Friday, starting from behemoths JPMorgan Chase and Citigroup to super regional banks like U.S. Bank and PNC Financial. In calls with journalists and investors, bank executives painted a bifurcated picture of the economy.
On one hand, they noted a low level of delinquencies, solid consumer spending and healthy activity amongst their business clients. At the identical time, they acknowledged multi-decade high levels of inflation, a housing market that’s slowing down quickly, and a Federal Reserve that’s raising rates at an unprecedented pace, which can make it harder for businesses to borrow.
“Inflation is casting a protracted shadow on these banks’ future outlooks,” said Peter Torrente, U.S. national sector leader for banking and capital markets at accounting giant KPMG
Inflation has been persistently high for months, with this week’s reading of consumer prices showing an 8.2% rise in costs in September from a yr earlier. Fed officials have pushed up their short-term rate by a hefty three-quarters of a percentage point 3 times in a row, bringing it to a spread of three% to three.25%, the best in 14 years. Wall Street is expecting one other 0.75 percentage point hike in November.
Reflecting the dimmer macroeconomic view, Citigroup, Wells Fargo and JPMorgan socked away money of their loan-loss reserves. These reserves are put aside to cover potentially bad loans. Throughout the pandemic, banks put tens of billions of dollars into these reserves but had released the majority of those funds in 2021 reflecting the advance within the economy.
Now the banks are again fortifying the reserves. JPMorgan put aside roughly a $1 billion in its loan loss reserves, while Citigroup and Wells each roughly put $400 million into their reserves this quarter. The pace of additives is slower than on the onset of pandemic when, for instance, JPMorgan put greater than $10 billion into its reserves in a single quarter.
The goal of the Fed’s rate increases is to slow the economy and produce down inflation. The potential of going too far and causing a recession is an enormous concern for economists, Wall Street analysts and bank executives.
Wells Fargo CEO Charlie Scharf told investors on a conference call that the bank expects broader economic conditions to weaken, leading to increases in delinquencies and credit losses.
Cecere, the U.S. Bank CEO, said, “While the backdrop is favorable today, it might not be surprising to us to see an economic slowdown develop sooner or later driven by lower confidence levels, which can result in reduced spending and business investment.”
JPMorgan Chase CEO Jamie Dimon made headlines Monday when he said a “very, very serious” mixture of concerns may lead to a recession in the following six to nine months.
On Friday, Dimon talked up the actual fact U.S. consumer health stays strong. Investors pushed to get clarity.
“I’m attempting to reconcile your comments before and now,” Mike Mayo, an analyst with Wells Fargo Securities, said to Dimon.
In response, Dimon described the present economic environment as “odd.” reflecting the actual fact delinquencies are low and consumer spending stays strong despite the inflationary headwinds. But he predicted that the additional savings U.S. households socked away through the pandemic would likely be exhausted by mid 2023, if inflation will not be brought under control.
One thing supporting Dimon’s comments is the quantity of spending consumers are doing with their bank cards. Wells Fargo, Citigroup and JPMorgan all reported double-digit increases in consumer bank card spending in comparison with a yr earlier.
While JPMorgan executives said that a few of that spending may be consumers returning to pre-pandemic spending trends, inflation might simply be stretching household budgets.
Copyright 2022 The Associated Press. All rights reserved. This material might not be published, broadcast, rewritten or redistributed.
