Even though Goldman Sachs economists recently raised their estimate on the chance of recession to 35% within the next 24 months, and other experts think it could happen even sooner, Bank of America (BAC 0.50%) economists seem pretty confident that investors won't see a recession in 2022 -- and maybe not in 2023 either.
Bank of America CEO Brian Moynihan said that economists "always have a prediction for a recession that runs around 10%, 20%." He added, "Our economists do not have a recession predicted in terms of this year, it's around 3% growth, next year, a little over 2%." Here's why Moynihan and Bank of America feel fairly confident that recession is unlikely this year.
Strength of the consumer
While inflation and oil prices are surging and making the cost of everything more expensive, management at Bank of America pointed out numerous statistics on their first-quarter earnings call that showed just how strong the consumer is right now. Not only did consumers save during the pandemic, but added benefits from stimulus monies seem to have really buoyed their cash positions.
For the cohort of customers that had an average balance of $1,400 in their bank accounts prior to the pandemic, that same cohort now has an average balance of $7,400. If you go to the next cohort that had between $2,000 and $5,000 in their Bank of America accounts, the new average balance of this cohort is $12,500. Moynihan pointed to factors such as wage growth and higher savings enabled by limited spending. In the first two weeks of April, Moynihan said spending is growing and was 18% higher over the same time period in April 2021.
Lower-income consumers at Bank of America appear to be in much stronger shape as well. Customers with FICO scores below 680 on average have credit card balances (and therefore less debt) 12% lower versus the first quarter of 2020 and deposit balances that are up 39% on average.
Total spending at Bank of America in Q1 is up 14% year over year, the fastest growth seen in three years. Credit and debit spending is also still growing in all the main consumer categories on a year-over-year basis, and travel and entertainment spending has rebounded.
Consumer credit is also incredibly strong. Credit card delinquencies at the end of the first quarter of 2022 are still well below pre-pandemic levels, as well as are actual charge-offs, which is debt unlikely to be collected and a good representation of actual loan losses. Bank of America in Q1 also released reserves previously stored away for loan losses, which were offset by building reserves for the bank's minimal Russian exposure and due to normal loan growth.
On the commercial side, Bank of America also seemed confident. Commercial loan growth in Q1 drove total loan growth in the quarter, with commercial loans up 5% from the end of 2021, and commercial credit is as good as it's ever been. Bank of America's CFO Alastair Borthwick said while commercial revolving loan utilization has ticked up to 31.7%, the normal level pre-pandemic was 35%.
Assessing where we are
Moynihan and Borthwick aren't downplaying the strain on the economy from inflation, Russia's invasion of Ukraine, and the Federal Reserve's difficult task ahead of trying to rein inflation by increasing interest rates and reducing its balance sheet without tipping the economy into a recession.
In their economic assumptions that drive all of their modeling and future forecasting, Borthwick said the bank reduced some of its upside weighting, put more weighting on the baseline scenario, and a little more weight toward the downside, while also increasing its forecast for inflation.
But as Moynihan pointed out, U.S. household deposit and cash levels are $3 trillion higher right now than pre-pandemic levels. This will likely take time to drain out of the system, during which the Fed can hopefully engineer a soft landing. While economic uncertainty is sky-high, I do find it unlikely -- barring any more extreme events -- that the economy tips into a recession this year when you consider the strength of U.S. consumers and the business community right now.