As inflation surges and the Federal Reserve plans to raise its benchmark overnight lending rate, the federal funds rate, several times this year, investors are keeping close tabs on the financial health of the consumer. Not only do many banks and fintech companies do a lot of business with the consumer, but consumer health is vital to the health of the economy because consumers buy goods and services, which drives business activity, and spend in many other ways. Recently, JPMorgan Chase (JPM -0.54%) reported its first-quarter earnings report. Because JPMorgan Chase is the largest bank in the country, it has a good handle on the state of the economy. Here is what new data from the nation's largest bank is telling us about the state of the consumer.
Spending slows, credit remains healthy
A good way to glean insights into the consumer is to look within JPMorgan's consumer and community banking division. This division is one of the core businesses of the bank, providing mortgages, auto loans, credit card loans, and other consumer and small-business banking loans.
Data source: JPMorgan Chase. Chart by author.
Loans in nearly all of JPMorgan's consumer lending categories were on the rise at the end of 2021. But whether due to surging inflation or the Fed's planned rate hikes, consumer spending seemed to drop off in the first quarter of 2022. Auto loans were roughly flat, credit card loans -- which had surged at the bank in the previous quarter -- fell 1% in Q1, mortgages fell 5%, and consumer and business banking loans fell about 7%. Higher rates and more rate hikes to come likely played a big part in this sudden dip. Earlier this month, data showed that mortgage applications had fallen more than 40% from April of 2021, as the mortgage rate on a 30-year fixed mortgage rose past 4.7%.
The good news, at least for the time being, is that consumer credit quality is still quite strong. In none of the preceding consumer lending categories was there a big uptick in net charge-offs, which is debt unlikely to be collected and a useful metric for evaluating potential and likely loan losses.
Data source: JPMorgan Chase. Chart by author.
Auto and mortgage net charge-offs as a percentage of total loans in each category are still extremely low. Credit card charge-offs have started to move higher but at 1.37% are still extremely low. Consumer and business banking net charge-offs moved from 0.91% to 1.07%, which is a decent move higher, but loan volume is also way down in that category, likely inflating the move a bit. If you look at 30-plus-day delinquency trends in the auto, mortgage, and credit card categories, they are even better, with mortgage and auto delinquencies down slightly from the fourth quarter of 2021 and credit card delinquencies up just slightly.
What to expect
With the Fed indicating that it will raise the federal funds rate at each of its next six meetings, the consumer is headed into the eye of the storm, and based on data from JPMorgan, it seems the consumer has been slowed down by inflation or is preparing for what's to come.
But while JPMorgan Chase CEO Jamie Dimon has expressed concern about the future, he said the consumer is still in strong shape at the moment: "The consumer has money. They pay down credit card debt. Confidence isn't high, but the fact [is] that they have money, they're spending their money. They have $2 trillion still in their savings and checking accounts, business[es] are in good shape. Home prices are up. Credit is extraordinarily good."
It's no guarantee that the economy will dip into a recession. After all, the consumer is healthy, inflation could peak, and the Fed may slow its rate-hiking plans. But with consumer spending starting to slow a bit and the consumer heading into a much tougher environment, the financial health of the consumer is going to be an important factor for markets.
