JPMorgan Chase (NYSE: JPM) is currently the largest bank in the USA by total assets. Because of this status, JPMorgan is naturally able to feel the pulse of the country’s economy. The bank’s latest earnings conference call – for the third quarter of 2022 – contained useful insights on the state of American consumers and businesses. The bottom-line is this: (1) Consumer spending is still healthy, but there are risks on the horizon; (2) Leaders of small businesses are getting concerned about the macro-economic environment; and (3) Businesses and consumers are still in good financial health.
What’s shown between the two horizontal lines below are quotes from JPMorgan’s management team that I picked up from the call.
1. Consumer spending and consumer cash levels are still strong
Nominal spend is still strong across both discretionary and nondiscretionary categories, with combined debit and credit spend up 13% year-on-year. Cash buffers remain elevated across all income segments.
2. But consumer spending is growing faster than income, so deposits continue to fall, especially for lower income groups
However, with spending growing faster than income, we are seeing a continued decrease in median deposits year-on-year, particularly in the lower income segments.
3. Small businesses are increasingly worried about the macro environment
And not surprisingly, small business owners are increasingly focused on the risks and the economic outlook.
4. Auto-loan originations fell sharply
And in Auto, originations were $7.5 billion, down 35%, due to lack of vehicle supply and rising rates.
5. Card delinquencies remain well below pre-COVID levels, but are creeping up
Card delinquencies remain well below pre-pandemic levels, though we continue to see gradual normalization.
6. There’s just no crack in credit performance that JP Morgan’s management is seeing; but they do see some strain on future numbers that are coming from well-known current macro-economic issues
[Question] Would appreciate any perspective in terms of are you beginning to see cracks, either be it commercial, real estate, consumer where it feels like the economic pain from inflation, higher rates is beginning to filter through to your clients?
[Answer] The short answer to that question is just no. We just don’t see anything that you could realistically describe as a crack in any of our actual credit performance. I made some comments about this in the prepared remarks on the consumer side. But we’ve done some fairly detailed analysis about different cohorts and early delinquency bucket entry rates and stuff like that. And we do see, in some cases, some tiny increases. But generally, in almost all cases, we think that’s normalization, and it’s even slower than we expect…
…[Answer] I think we’re in an environment where it’s kind of odd, which is very strong consumer spend. You see it in our numbers. You see it in other people’s numbers, up 10% prior to last year, up 35% pre-COVID. Balance sheets are very good for consumers. Credit card borrowing is normalizing, not getting worse. You might see — and that’s really good. So you go in to recession, you’ve got a very strong consumer. However, it’s rather predictable if you look at how they’re spending and inflation. So inflation is 10% reduces that by 10%. And that extra cap — money they have in the checking accounts will deplete probably by sometime midyear next year. And then, of course, you have inflation, higher rates, higher mortgage rates, oil volatility, war. So those things are out there, and that is not a crack in current numbers. It’s quite predictable. It will strain future numbers.
7. JPMorgan’s CEO, Jamie Dimon, thinks conditions today are the same compared to a few months ago, when he commented that a “hurricane” was coming
[Question] Let’s just cut to the chase. So where are you versus 3 months ago? I mean, is it — you certainly got headlines with the hurricane comment and all that. And it’s — look, like as you said, you have Fed tightening, QT, tighter capital rules for banks. You have like the trifecta of tightening by the Fed and then you have wars and everything else. So I don’t think that even stock market supports your view and about all the risks out there, but are things better or worse or the same as they were 3 months ago?
[Answer] They’re roughly the same. We’re just getting closer to what you and I might consider bad events. So — in my hurricane, I’ve been very consistent, but looking at probabilities and possibilities. There is still, for example, a possibility of a soft wind. We can debate. We think that percentage of yours might be different than mine, but there’s a possibility of a mild recession. Consumers are in very good shape, companies are in a very good shape. And there’s possibility of something worse, mostly because of the war in Ukraine and oil price and all things like that. Those — I would not change my possibilities and probabilities this quarter versus last quarter for me…
8. Mortgages and auto loans expected to decline further
I mean look at the volumes and mortgage have dropped and cars quota have dropped and stuff like that. And that’s already in our numbers, and we would expect that to continue that way.
9. Jamie Dimon summarising the state of things: The overall picture looks good, but dark clouds are gathering on the horizon
In the U.S., consumers continue to spend with solid balance sheets, job openings are plentiful and businesses remain healthy. However, there are significant headwinds immediately in front of us – stubbornly high inflation leading to higher global interest rates, the uncertain impacts of quantitative tightening, the war in Ukraine, which is increasing all geopolitical risks, and the fragile state of oil supply and prices. While we are hoping for the best, we always remain vigilant and are prepared for bad outcomes so we can continue to serve customers even in the most challenging of times.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I don’t have a vested interest in any company mentioned. Holdings are subject to change at any time.