In recent months, signs that this year's high inflation could persist have spooked investors and led to a lot of uncertainty around the stock market. In October, the Consumer Price Index had its largest single-month increase in more than 30 years, and Federal Reserve Chairman Jerome Powell said he would no longer use the word "transitory" when talking about the current inflation situation. There are concerns about labor shortages and the ongoing pandemic-driven supply chain issues too.
However, at the Goldman Sachs U.S. Financials Services Conference held this month, bank CEOs seemed to have nothing but good things to say about the current state of the U.S. consumer. Obviously, things can change quickly, and investing is about looking to the future, but there are reasons to believe Americans can stay financially healthy next year, which would bode well for the economy and (potentially) the stock market as well.
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The current state of the consumer
The last round of Washington's economic stimulus checks went out in April, and enhanced unemployment benefits expired in September, yet consumers across the wealth spectrum still have, on average, more money in savings than they did in previous years. They're also spending at much higher levels.
Bank of America CEO Brian Moynihan said customers who had $1,000 to $2,000 in their checking accounts before the pandemic now average more than triple that amount. More affluent customers who previously had $5,000 to $10,000 in checking now have up two or three times as much in those accounts, and their account balances have been growing in recent months. In the same vein, Wells Fargo CEO Charlie Scharf said his bank's customers still have account balances that are up an average of 30% to 35% from where they were prior to the pandemic.
While consumers received assistance from the federal government in 2020 and early 2021, inflation has also made everyday items more expensive, and spending has risen significantly. Moynihan said consumer spending (which his company measures by tracking credit and debit card transactions) in November was up more than 20% year over year, and up about 28% from Nov. 2019.
I find these trends interesting, because while there was clearly pent-up demand for many goods and services due to the pandemic, the gross domestic product (GDP) of the U.S. is still projected to grow about 5.6% in 2021. As such, I wouldn't have been surprised to see lower account balances at this point. One reason consumers are in relatively strong economic positions is the fact unemployment is now much lower. In fact, the core unemployment rate hit 4.2% in November, the lowest it has been since the pandemic began. Now, one could argue there are still a lot of people without jobs who were previously working, but there are still many jobs available. Companies all over are reporting higher labor costs, because they're having to boost wages to attract and retain employees. Simply put, the American worker is in demand right now.
Lastly, credit quality at banks has remained strong. A bank's net charge-off rate measures the amount of debt on its books that it doesn't expect will be repaid as a percentage of its total loan balance. At the end of the third quarter, Wells Fargo had a net charge-off rate of just 0.12%, which is astoundingly low. Scharf believes the "bottom has been reached," but Moynihan said that as long as the economy keeps growing at 2% to 4%, he expects credit quality will remain strong because of wage growth and strong employment. Under those circumstances, he remarked, "[W]hy wouldn't people pay their bills?" Bank of America is currently projecting 4% U.S. GDP growth next year and 2% GDP growth globally.
Can the consumer stay strong next year?
The U.S. consumer may not be able to maintain this kind of financial health forever, but I'm not yet convinced the Federal Reserve's benchmark interest rate hikes next year will deter people from spending or paying their bills. Inflation has certainly climbed above the Fed's target zone, so it's reasonable for the central bank to speed up its timeline for raising the fed funds rate in an effort to moderate price growth. Moreover, it wouldn't be smart policy to keep benchmark interest rates at or near zero forever -- if another recession pops up, the Fed needs to be able to lower interest rates to support the economy. But if the consumer stays financially healthy in 2022, that bodes well for the economy and could help the stock market too, because the inflation is not nearly as bad if it's boosting economic growth.
