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Economists, investors and business leaders have been debating for months whether the economy is headed for a soft landing or a hard landing. But there is a third option: no landing at all.
Rather than the economy slowing gradually or rapidly, it might actually be poised to keep growing as it is, at a moderate or better pace. Bank executives’ recent comments have suggested that some of the recent indicators of slowing for consumers and businesses might be more echoes of the past than visions of the future.
There are some numbers that might spark concern. JPMorgan Chase JPM 4.44%increase; green up pointing triangle and Wells Fargo WFC 5.61%increase; green up pointing triangle on Friday both reported slowing card spending growth and rising late card payments. For example, JPMorgan’s card-services sales volume, which excludes commercial cards, rose just under 7% from a year prior, versus closer to 8% growth in the second quarter, and over 9% in the first.
On the face of it, that appears to be a sign that activity might be slowing, albeit perhaps only softly. But JPMorgan Chief Financial Officer Jeremy Barnum said the spending numbers still need to be considered with the pandemic, and its aftermath, as context.
“I think we’re getting to the point where it no longer makes sense to talk about the pandemic,” Barnum told analysts Friday. “But maybe one last time.”
Coming out of that difficult period, there was a “heavy rotation” into travel and entertainment spending, “as people did a lot of traveling and they booked cruises that they hadn’t done before, and everyone was going out to dinner a lot, whatever,” Barnum said. “That’s now normalized.”
Normally a reduction in this kind of spending might signal a rotation out of discretionary spending and into nondiscretionary items—the things you need every day, such as gasoline or groceries. That in turn is usually a sign that consumers are preparing for a worse economic environment.
But that isn’t what JPMorgan has been seeing across its consumer data. For example, it hasn’t seen a weakening in retail spending.
“So overall, we see the spending patterns as being sort of solid and consistent with the narrative that the consumer is on solid footing, and consistent with the strong labor market and the current central case of a kind of no-landing scenario economically,” Barnum said.
By the same token, some of the things seen in consumer credit are also in part a reflection of the unusual conditions of the past few years.
Consistently, lenders have said that some of their worst credit performance is among the “vintages” of lending done in parts of 2021 or 2022, when many borrowers were unusually flush because of things such as government stimulus checks, superlow interest rates and the forced belt-tightening of lockdowns. Under these conditions, certain borrowers got access to credit they wouldn’t have in other circumstances. But overall, the set of loans exposed to this issue appears manageable.
Even for the segment of customers that have struggled more to keep up with payments, there are reasons to anticipate some improvement. Wells Fargo Chief Executive Charlie Scharf on Friday told analysts that “the benefits of inflation slowing and interest rates starting to ease should be helpful to all customers but especially those on the lower end of the income scale.”
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Ultimately, banks’ numbers need context when it comes to economic analysis. Consider corporate loan demand. Alternative ways for commercial clients to borrow, via the credit markets, can be a reason banks’ loan growth might look soft. JPMorgan on Friday noted that in multifamily commercial real estate, there are “encouraging signs” in new originations as longer-term interest rates come down—but that overall lending growth might stay muted as more older loans start to pay off.
Time can help too. Beyond the presidential election, and if interest rates come down, “Those things will come together and help give clients more confidence about either building inventories or making further capital expenditures that they’re holding off on now,” Wells Chief Financial Officer Michael Santomassimo told analysts Friday.
Even rising credit-card charge-off rates can reveal an economy-boosting trend, which is the loosening of credit conditions. JPMorgan has said that its expected card net charge-off rate this year, around 3.4%, is below what it has targeted longer-term in underwriting new card debt. That means the bank can lend to a wider range of customers, or let customers borrow a bit more, and still make money even if defaults tick up.
Wells and JPMorgan are both still aiming for solid growth in cards. JPMorgan told analysts that although lower interest rates might slow the bank’s core net interest income into 2025, by the middle of next year growth in revolving card balances might start to help it build up again. New card products keep coming too: Wells in the third quarter launched new travel-rewards credit cards with Expedia Group.
No landing, after all, implies more flying.
Write to Telis Demos at Telis.Demos@wsj.com
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Appeared in the October 14, 2024, print edition as 'Soft Landing or Hard? Bank Results Show Path to No Landing'.
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