Jamie Dimon is one of the most respected voices on Wall Street. He navigated JPMorgan Chase (JPM 0.49%) through the financial crisis without a government bailout, and he has maintained its leadership in the banking industry. And, as chief executive of the largest U.S. bank by assets, he has unique insight into the state of the economy.
So it was telling when Dimon said on JPMorgan's latest earnings call that his bank is expecting only a mild recession. In its earnings release, the bank said it was taking a provisional charge of $2.3 billion for credit losses, including a $1.4 billion build on reserves for future losses. CFO Jeremy Barnum elaborated that the bank's outlook included the unemployment rate peaking at 4.9%.
Dimon's comments are a notable contrast from what he said earlier about the economy. Back in October, Dimon had said there are "very, very serious things" that were likely to push the world into a recession in the next six or nine months, and last May, he referred to a potential economic crash as a "hurricane" coming toward us.
Why the improved outlook?
Image source: Getty Images.
Will we get a soft landing?
The stock market has bounced off of its October lows, but there are still a number of factors that will determine whether or not the economy has a soft landing -- that is, if the Federal Reserve can bring inflation down without sinking the economy into a deep recession.
On the subject of inflation and interest rates, Dimon seems to be on the bearish side, predicting this month that the benchmark federal funds rate could go as high as 6%, beyond the Fed's forecast of 5.1% at the end of the year. He also said on CNBC, "There's a lot of underlying inflation, which won't go away quick," and he pointed to the temporary impacts of falling oil prices and the Covid-related slowdown in China for bringing down inflation, but those could reverse.
Though Dimon is urging caution on inflation and interest rates, the data show a marked improvement in recent months as key inflation numbers have cooled off substantially since their peak in June. According to the consumer price index, prices rose 6.5% year-over-year in December, its slowest reading since October of 2021, and month-over-month inflation actually fell 0.1% due to declining energy prices. Over the last six months of the year, the annualized inflation rate was just 1.8%, less than the Fed's target of 2%.
In December, the producer price index, which measures wholesale prices and therefore tends to be a leading indicator for consumer prices, fell 0.5% from the previous month and was up 6.2% from a year ago, its slowest rate of increase in 2022.
Additionally, the yield on the benchmark 10-year Treasury note has fallen by nearly 1 percentage point over the last three months, a sign bond investors expect the rate hikes to stop soon.
What JPMorgan's numbers really mean
As for JPMorgan's own forecast of a 4.9% peak in unemployment, that represents a meaningful increase from the current rate of 3.5%, but it would still mark the lowest peak unemployment rate for a recession in modern history.
The company itself also seems to be planning for continued growth. In spite of the larger provision for credit losses, JPMorgan's own results show the bank, and the economy, is still doing well. Its revenue was up; loans were up, and its debit and credit card volumes increased by 9%, showing consumer spending remains strong. Net income also increased in the quarter, and the company continues to grow its workforce, adding more than 5,000 employees in the quarter, a sign it's not adjusting its operations for a recession.
The Federal Reserve is expected to continue raising rates, but if inflation keeps falling, the rate hikes could soon cease. Even if there is a mild recession, that may already be priced into the market as the S&P 500 is still down 17% from its peak last January after falling as much as 25% from peak to trough.
Based on JPMorgan's results, Dimon's dialed-down forecast of a recession, the steady decline in inflation and treasury rates, the worst of the recession fears could be behind us.
With a number of top stocks still trading at a substantial discount, now looks like a great time to buy.
