Bank of America, Goldman Sachs, Citi, JPMorgan and Wells Fargo tout consumer strength
A potentially looming recession in the U.S. is practically invisible in most Americans' bank accounts.
"While sentiment has shifted, little of the data I see tells me the U.S. is on the cusp of a recession," Citigroup CEO Jane Fraser said during the company's second-quarter earnings call on Friday.
"Consumer spending remains well above pre-COVID levels, with household savings providing a cushion for future stress, and as any employer will tell you, the job market remains very tight," she added.
JPMorgan Chase CEO Jamie Dimon shares the same view.
"Consumers are in good shape," he said on a call with investors on Thursday after the company reported its second-quarter earnings. "They have more income, jobs are plentiful, they're spending 10% more than last year, almost 30% plus more than pre-COVID," Dimon added.
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Some of that increase in spending is driven by inflation, which hovers at a 40-year high, Jeremy Barnum, the company's chief financial officer, said. "At the same time, we have yet to observe a pullback in discretionary spending including in the lower income segments with travel and dining growing."
Is there going to be a recession?
Dimon delivered an ominous warning during the company's investor day in May saying that he sees "big storm clouds" and a potential "hurricane" brewing for the U.S. economy. But he said that the stormy conditions could "dissipate" depending on whether the Fed achieves a soft landing as it raises interest rates to curb inflation.
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A soft landing implies that the Fed can raise interest rates without causing the economy to fall into a recession. Raising interest rates makes it more expensive for consumers to borrow money to finance their homes, cars, and credit card purchases.
More economists have grown pessimistic that the Fed will achieve a soft landing. Bank of America researchers predict there will be "a mild recession" in the U.S. this year.
Are consumers prepared for a recession?
Consumers are still clinging to the savings they accumulated during the pandemic from stimulus checks and enhanced unemployment benefits. Households began the year with around $2.7 trillion in excess savings, according to estimates from Moody's.
"Consumers continue to spend at a healthy pace even as some time has passed since the receipt of any stimulus," Brian Moynihan, Bank of America CEO said on the company's Monday earnings call. "And importantly, we're seeing no deterioration in our customer's asset quality, and they have the capability to borrow."
He added that there is "strong consumer resilience," even in the face of a potentially looming recession and that FICO credit scores have improved for people taking out consumer loans.
Similarly, Goldman Sachs executives said they didn't observe any "deterioration" of credit quality last quarter.
Even though consumers are dipping into their savings more frequently now, "they still have that cushion," said S&P Global Market Intelligence lead banking analyst Nathan Stovall.
It's also encouraging that consumers aren't highly leveraged, meaning they aren't taking on a lot more debt relative to their income, Stovall said echoing Dimon's remarks. Going into the Great Recession and the pandemic-induced recession consumers' debt-to-income ratios were above current levels.
Wells Fargo CEO Charles Scharf said that consumers' credit card utilization rate, meaning the portion of available credit they use, remains below pre-pandemic levels.
"Payment rates remain strong, and delinquency rates remain low," Scharf said during the company's Friday earnings call.
Are banks prepared for a recession?
Banks are required to undergo annual stress tests administered by the Federal Reserve to ensure they can handle economic downturns.
Additionally, Bank of America, Citibank, Chase, and Wells Fargo are adding millions of dollars to their reserves to cover more loan defaults, among other measures, if the U.S. enters a recession.
"When you've got somebody saying, 'Everything's fine, but we're building reserves because we're nervous about the future,' that doesn't make you want to jump up and down and say, 'The future looks terrific,'" Stovall told Paste BN.
Elisabeth Buchwald is a personal finance and markets correspondent for Paste BN. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here