In recent weeks there have been numerous warnings from analysts and economists that the U.S. economy is headed toward a recession in 2023 or maybe 2024.
The yield curve is now the most inverted it's been in decades, which is usually a flashing sign that a recession is imminent.
But there still seems to be debate about the severity of this looming recession and what it might bring. While some are forecasting doom and gloom scenarios, major bank CEOs said at a recent conference that they are currently only expecting there to be a "mild" recession. Here's why.
Still seeing a healthy consumer
There does seem to be conflicting information regarding the consumer right now. The U.S. personal savings rate, which looks at personal savings as a percentage of disposable personal income, hit historic lows in October at 2.3%. Consumer debt is also piling up and has now zoomed past pre-pandemic levels when looking at outstanding revolving credit.
Yet major banks such as JPMorgan Chase (JPM +2.08%), Bank of America (BAC +0.07%), Citigroup (C +0.66%), and Wells Fargo (WFC +0.65%) are all seeing healthy consumer deposit balances and a clean bill of health when it comes to credit.
Image source: Getty Images.
Bank of America's CEO, Brian Moynihan, said that consumer deposit balances for most cohorts the bank monitors are still up 10% year over year, but they peaked in April, and the growth of balances has slowed. However, Moynihan pointed out that this is the intention of the Federal Reserve's interest rate hikes -- to slow the economy -- and as long as most of these consumers stay employed, the chances of them spending their excess savings are relatively small.
NYSE: BAC
Key Data Points
This puts a heavy focus on the unemployment rate and what will happen in the future. After the November jobs report, the unemployment rate stayed strong at 3.7%. Currently, Moynihan as well as Marianne Lake, who is co-CEO of JPMorgan's consumer and community banking division, are only projecting unemployment to rise to around 5% or slightly more and peak there by the end of 2023 or early 2024. Lake added that this would really be a good outcome for the economy if it plays out.
Now, this doesn't mean JPMorgan and Bank of America's projections won't change. Looking at lower-income customers that have annual incomes of $50,000 or less, Lake said they still have pretty good cash buffers in terms of being able to pay their bills, much higher than pre-pandemic levels. However, Lake added that these customers are normalizing faster, which has been the case for a while now. She expects their cash buffers to get back to pre-pandemic levels toward the middle of next year, which she expects to be a very "instructive" time period.
But with unemployment still quite low, deposit balances still very healthy, and credit losses at 30-year lows, and considering that things like credit deterioration and rising unemployment will take some time to normalize, Lake and Moynihan simply aren't expecting a severe recession right now.
Looking at business customers
Wells Fargo's CEO, Charlie Scharf, spoke about the bank's large commercial franchise and how this group of customers is holding up. He said a lot of the bank's business clients are "nervous" right now. Inflation is still keeping the cost of doing business high, but businesses are less confident in their ability to keep passing on the higher costs to the consumer.
NYSE: WFC
Key Data Points
But what has surprised Scharf the most is the fact that corporate balance sheets haven't deteriorated as much as he might have expected. Balances and spending are coming down but more as a result of normalization, and it's more industry-specific. "And as long as there's not some material acceleration, it certainly should be all manageable," Scharf said.
In terms of commercial real estate properties, Scharf urged investors to look past the headlines and realize that there are many different types of commercial real estate loans at very different phases.
He noted that office buildings are among the most stressed types of properties right now due to lower office vacancy rates, but even within this category, there is a wide range of performance depending on where the buildings are located. Scharf ultimately thinks commercial real estate losses will be quite "uneven" across the industry and boil down to how deals are structured and the different kinds of exposure various lenders have.
A continued state of uncertainty
The updates and outlook for a mild recession from bank executives are certainly good news, but I don't think they have quelled the uncertainty regarding a potential recession or how severe it might get.
The unprecedented amount of rate hikes conducted by the Fed this year has made the impact of said rate hikes hard to predict, and the full impact of these rate hikes has definitely not been felt yet.
If consumers and businesses can normalize more gradually and unemployment rises modestly as some price stability is restored, then I definitely think the U.S. economy can avoid a severe recession. But if there is a sudden jolt and unemployment jumps, and inflation remains persistent, the consumer and economy might really struggle.
Unfortunately, the market will likely remain volatile until there is a better line of sight, so the wait presses on.
