Banking analysts and investors are excited about the spending outlook as inflationary risks mount

FILE PHOTO: A man walks down Wall Street in New York
FILE PHOTO: A man walks down Wall Street in New York September 18, 2008. REUTERS/Eric Thayer

March 29, 2022

By Elizabeth Dilts Marshall

NEW YORK (Reuters) – Analysts and investors at major Wall Street banks are eagerly awaiting insights from executives on the outlook for consumer spending and borrowing, a key source of revenue, when first-quarter results are announced next month.

Consumer spending in the US has been rising for months as the country emerges from the COVID-19 pandemic and Americans make up for lost time traveling, shopping and eating, bankers and economists say.

Despite the momentum, there are signs that the end of pandemic-era financial aid and inflation at a 40-year high, exacerbated by Russia’s invasion of Ukraine, is beginning to weigh on the finances of lower-income Americans .

Executives from JPMorgan Chase & Co, Bank of America and Wells Fargo & Co, which together bank about half of all US households, say American consumers have been in good health for months, spending more and taking advantage of bank balances during the grown during the pandemic to pay off credit cards and other debts.

So far, consumer spending appears to be holding up. But the prospects for income growth and the reality of higher costs for basic necessities signal problems.

Bank of America, the second-biggest U.S. bank, said its customers spent $63 billion on debit and credit cards in February, up 21% from a year ago, with higher spending on travel, food, public transportation and Gym memberships.

“We saw a strong continuation of payment and spending trends in February,” said Mary Hines Droesch, director of consumer and small business products at Bank of America. “(The data) suggests that more consumers are returning to the office and resuming more in-person activities.”

U.S. retail sales rose more than 17% year over year in February, though month-on-month growth slowed slightly as Americans bounced back from a January spending spree, according to U.S. Commerce Department data.

“Despite record-high inflation and an 11-year low in consumer sentiment, US consumption, particularly retail sales, has shown resilience,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

Consumer behavior has been bolstered by a tight labor market, excessive savings and “solid household balance sheets,” she said.

More data will be available on April 13 when JPMorgan opens earnings season, followed by Wells Fargo on April 14 and Bank of America on April 18.

As people return to old spending habits, confidence in their prospects for meaningfully growing income over the next two years is at an eight-year low, according to University of Michigan data, and economists say real incomes are a more specific measure of wealth, Crater.

Goldman Sachs economic analyst Jason Briggs expects real household income to grow by just 0.5% in 2022 and low-income incomes to fall this year due to inflation and the end of government support.

“The biggest headwind for real spending growth in 2022 is very weak real income growth,” Briggs wrote in a note to investors last week.

One area of ​​lending – autos – is seeing an increase in delinquencies from borrowers with the lowest credit ratings.

Auto loan arrears rose for the ninth straight month in February, led by subprime borrowers, according to a report by Manheim Consulting. The report also found that the percentage of subprime auto loans in serious arrears was at its highest level since 2006, even as the percentage of all subprime loans hovered near record lows.

The New York Federal Reserve last week identified another possible cause of trouble on the horizon: 37 million federal student loan borrowers will have to start making payments again starting in May.

Payments for federal student loans have been suspended since March 2020, when the government temporarily placed those loans on leniency.

Meanwhile, the 10 million student loan borrowers who had to keep making payments were “struggling with their debt,” New York Fed research analysts wrote.

“The difficulties these borrowers face in managing their (private) student loans and other debt suggest that (state student loan) borrowers will face mounting arrears once forbearance ends and payments resume ‘ researchers at the New York Fed wrote in a blog post.

(Reporting by Elizabeth Dilts Marshall; Editing by Matt Scuffham and Bernard Orr) Banking analysts and investors are excited about the spending outlook as inflationary risks mount


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