Recent debates have centered around whether the U.S. economy will experience a "soft landing" or a "hard landing." However, recent banking reports suggest a third possibility: the economy might not "land" at all, continuing its strong growth without a significant slowdown. This scenario, referred to as "no landing," may happen when robust growth persists without effectively controlling inflation, leaving little room for the Federal Reserve to lower interest rates. Stocks might benefit from strong economic performance but remain under pressure from rising risk-free rates, resulting in overall market volatility.
Both JPMorgan Chase (JPM, Financial) and Wells Fargo recently reported slowing credit card spending growth and increased credit card delinquencies. For example, JPM's credit card sales rose nearly 7% year-over-year, a slower growth compared to previous quarters. This could indicate a normalization of post-pandemic consumer behavior rather than a prelude to recession.
JPM's CFO Jeremy Barnum noted that spending on travel and entertainment is normalizing after a post-pandemic surge, while retail spending remains solid, indicating sustained consumer confidence. In typical scenarios, reduced discretionary spending might suggest a shift towards essential purchases, such as groceries and fuel, signaling caution, but this trend hasn't been reflected in JPM's consumer data.
Additionally, banks attribute some increase in delinquent payments to loans made during unique conditions in 2021-2022, where government support and forced savings led to unusually strong borrower financials. Despite these issues, major Wall Street banks see these loans as manageable.
Wells Fargo's CEO Charlie Scharf expressed optimism that easing inflation and declining interest rates will relieve consumer pressure, particularly for low-income groups. Credit card charge-off rates are rising, possibly indicating a loosening credit environment favorable for economic growth. For instance, JPM expects a 3.4% net charge-off rate, below its long-term underwriting targets, enabling broader clientele access to credit.
Acknowledging these indicators, both Wells Fargo and JPM see growth potential in credit card business. JPM foresees growing revolving credit card balances to bolster net interest income, even with lower rates potentially slowing growth. New credit card products are being launched to capture market opportunities, like Wells Fargo's travel rewards card in collaboration with Expedia.
Overall, the insights from Wall Street majors and their strong performance suggest a "no landing" scenario for the U.S. economy. Yet, analysts caution monitoring upcoming economic indicators to confirm this trend's sustainability amidst evolving global economic conditions.
