Bank analysts, investors are antsy for spending outlook as inflation risks grow

Analysts and investors of major Wall Street banks are eagerly
anticipating any insight from executives on the outlook for consumer
spending and borrowing, a key source of revenue when first-quarter
earnings are unveiled next month.

U.S. consumer spending has been rising for months as the country
emerges from the COVID-19 pandemic and Americans make up for lost time
traveling, shopping, and dining out, bankers and economists say.

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

Executives from JPMorgan Chase & Co (JPM.N), Bank of America (BAC.N),
and Wells Fargo & Co (WFC.N), which together bank around half of all
U.S. households, have said for months the American consumer is in good
health, spending more and using account balances, which grew during
the pandemic, to pay down credit cards and other debt.

So far, they say, consumer spending appears to be holding up. But the
outlook for income growth an

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

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

U.S. consumer confidence rebounded from a one-year low in March, while
retail sales in February, the most recent month available, rose more
than 17% over last year, according to data from the U.S. Commerce
Department.

“Despite record-high inflation and an 11-year low in consumer
sentiment, U.S. consumption, especially retail sales, has proven
resilient,” said Lisa Shalett, chief investment officer at Morgan
Stanley Wealth Management.

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

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

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

Goldman Sachs economic analyst Jason Briggs expects that real
household income will only grow by 0.5% in 2022, and that income for
the lowest-wage earners will decline this year because of inflation
and the end of government assistance.

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

One area of lending – cars – is seeing a rise in delinquencies from
borrowers who have the lowest-quality credit.

Delinquencies on auto loans rose in February for the ninth-straight
month, led by sub-prime borrowers, according to a report from Manheim
Consulting. The report also found that the percentage of sub-prime
auto loans in serious delinquency was at its highest rate since 2006,
although the proportion of overall loans that are subprime has been
hovering near record lows.

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

Payments on federal student loans have been suspended since March 2020
when the government temporarily placed these loans in administrative
forbearance.

Meanwhile, the 10 million borrowers with private student loans who had
to continue making payments “struggled with their debt,” New York Fed
research analysts wrote.

“The difficulties faced by these borrowers in managing their (private)
student loans and other debts suggest that (federal student loan)
borrowers will face rising delinquencies once forbearance ends and
payments resume,” New York Fed researchers wrote in a blog post.

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