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 second quarter of 2022 – contained useful insights on the state of American consumers and businesses. The bottom-line is that while there are risks on the horizon, consumer spending in the USA is still healthy and the leaders of companies there think that their businesses are currently doing fine. What’s shown between the two horizontal lines below are quotes from JPMorgan’s management team that I picked up from the call.
1. Credit is still healthy and loan volumes continued to grow
Credit is still quite healthy and net charge-offs remain historically low. And there continue to be positive trends in loan growth across our businesses, with average loans up 7% year-on-year and 2% quarter-on-quarter.
2. Provision for credit losses were much higher than a year ago (when there was a release of previous credit loss charges) to account for a slightly weaker economic outlook
And credit costs were $1.1 billion, which included net charge-offs of $657 million and reserve builds of $428 million, reflecting loan growth as well as a modest deterioration in the economic outlook.
3. Consumer spending is still healthy, across both debit and credit cards, but there’s clear impact from inflation and higher non-discretionary spending; this said, there’s no pullback seen yet on discretionary spending
Spend is still healthy with combined debit and credit spend up 15% year-on-year. We see the impact of inflation and higher nondiscretionary spend across income segments. Notably, the average consumer is spending 35% more year-on-year on gas and approximately 6% more on recurring bills and other nondiscretionary categories. At the same time, we have yet to observe a pullback in discretionary spending, including in the lower income segments, with travel and dining growing a robust 34% year-on-year overall.
4. Consumer deposit balances are down, although cash buffers are still high
And with spending growing faster than incomes, median deposit balances are down across income segments for the first time since the pandemic started, though cash buffers still remain elevated.
5. Auto loan originations fell sharply
And in auto, originations were $7 billion, down 44% from record levels a year ago due to continued lack of vehicle supply and rising rates while loans were up 2%.
6. Loan growth outlook of high single digit for 2022, but no view on 2023 yet
Yes. So we’ve talked, as you know, Steve, about sort of a mid — high single digits loan growth expectation for this year. And that outlook is more or less still in place. Obviously, we only have half the year left. We continue to see quite robust C&I growth, both higher revolver utilization and new account origination. We’re also seeing good growth in CRE. And of course, we continue to see very robust card loan growth, which is nice to see. Outlook beyond this year, I’m not going to give now.
7. Lower income segments are where cash buffers are getting thinner, but they are still above pre-pandemic levels; JPMorgan’s management is also not sure if this is just simply normalisation or an early warning sign of deterioration
[Question] Okay. Great. And then just maybe on credit. It continues to look, I guess, very good, whether it’s on the consumer side or commercial side. Are you — we don’t really see it, but are you starting to see any initial cracks in credit or strains in the system?
[Answer] But if you really want to kind of turn up the magnification on the microscope and look really, really, really closely, if you look at cash buffers in the lower-income segments and early delinquency roll rates in those segments, you can maybe see a little bit of an early warning signal to the effect that the burn-down of excess cash is a little bit faster there. Buffers are still above what they were pre-pandemic, but coming down. And that absolute numbers for the typical customer are not that high. And you do see those early delinquency buckets still below pre-pandemic levels, but getting closer in the lower-income segment. So if you wanted to try to look for early warning signals, that’s where you would see it. But I think there’s really still a big question about whether that’s simply normalization or whether it’s actually an early warning sign of deterioration. And for us, as you know, our portfolio is really not very exposed to that segment of the market. So not really very significant for us.
8. JPMorgan’s CEO, Jamie Dimon, said a few months ago that a hurricane is coming, but he acknowledges that in the long-term, the economy will be fine; current economic conditions also look good
[Question] Could you help me reconcile your words with your actions? After Investor Day, Jamie, you said a hurricane is on the horizon. But today, you’re holding firm with your $77 billion expense guidance for 2022. I mean, it’s like you’re acting like there’s sunny skies ahead. You’re out buying kayaks, surfboards, wave runners just before the storm. So is it tough times or not?
[Answer] Now let me — we run the company. We’ve always run the company consistently, investing, doing this stuff through storms. We don’t like pull in and pull out and go up and go down and go into markets, out of markets through storms. We manage the company, and you’ve seen us do this consistently since I’ve been at Bank One. We invest, we grow, we expand, we manage through the storm and stuff like that.
And so — and I mentioned to all of you on the media call, but there are very good current numbers taking place. Consumers are in good shape. They’re spending money. They have more income. Jobs are plentiful. They’re spending 10% more than last year, almost 30% plus more than pre-COVID. Businesses, when you talk to them, they’re in good shape, they’re doing fine. We’ve never seen business credit be better ever like in our lifetimes. And that’s the current environment.
The future environment, which is not that far off, involves rates going up maybe more than people think because of inflation, maybe deflation, maybe a soft — there might be a soft landing. I’m simply saying, there’s a range of potential outcomes, from a soft lending to a hard lending, driven by how much rates go up; the effect of quantitative tightening; the effect of volatile markets; and obviously, this terrible humanitarian crisis in Ukraine and the war, and then the effect of that on food and oil and gas.
And we’re simply pointing out, those things make the probabilities and possibilities of these events different. It’s not going to change how we run the company. The economy will be bigger in 10 years. We’re going to run the company. We’re going to serve more clients. We’re going to open our branches. We’re going to invest in the things. And we’ll manage through that.
We do — if you look at what we do, our bridge book is way down. That was managing certain exposures. We’re not in subprime fundamentally. That’s managing your exposures. So we’re quite careful about how we run the risk of the company. And if there was a reason to cut back on something, we would. But now that we think it’s a great business that’s got great growth prospects, it’s just going to go through a storm.
And in fact, going through a storm, we will — that gives us opportunities, too. I always remind myself, the economy will be a lot bigger in 10 years, we’re here to serve clients through thick or thin, and we will do that…
…But that’s — yes, that’s very performance-based, too. And again, Mike, the way I look at it a little bit, in 15 years, the global GDP — or 20 years, the global GDP, global financial assets, global companies, companies over $5 billion will all double. That’s what we’re building for. We’re not building for like 18 months.
9. JPMorgan sees technology investments as being really helpful during recessions
[Question] So clearly running the company for the next 5 to 10 years. If we have a recession in the next 5 to 10 months, how does technology help you manage through that better? Whether it’s credit losses, managing for less credit losses, expenses, more flexibility, more revenues, maybe gaining market share. What’s the benefit of all these technology investments if we have a recession over the next…
[Answer] Mike, I think we gave you some examples at Investor Day. For example, AI, which we spend a lot of money on. We gave you a couple of examples, but one of them is we spent $100 million building certain risk and fraud systems so that when we process payments on the consumer side, losses are down $100 million to $200 million. Volume is way up. That’s a huge benefit. I don’t think you’d want to stop doing that because there’s a recession. And so — and plus, in a recession, certain things get cheaper, branches are enormously profitable, bank is enormously profitable. We’re going to keep on doing those things. And we’ve managed through recessions before, we’ll manage it again. And I’m quite comfortable we’ll do it quite well. We’re stop-starting on recruiting or training or technology or branch, right? That’s crazy. We don’t do that. We’ve never done that. We didn’t do it in ’08 and ’09. [ And it puts us in quite good stead ] in terms — yes.
10. From JPMorgan’s vantage point, consumers are in great shape
And the consumer, I feel like a broken record. The consumer right now is in great shape. So even we go into a recession, they’re entering that recession with less leverage, in far better shape than they’ve been — did in ’08 and ’09, and far better shape than they did even in 2020. And jobs are plentiful. Now of course, jobs may disappear. Things happen. But they’re in very good shape. And obviously, when you have recessions, it affects consumer income and consumer credit. Our credit card portfolio is prime. I mean, it’s exceptional. But again, we’re adults in that. We know that if you have a recession, losses will go up. We prepare for all that, and we’re prepared to take it because we grow the business over time. We’re not going to just immediately run out of it. And so I think it’s great the consumer’s is in good shape. And it sounds excellent that — I like the fact that wages are going up for people at the low end. I like the fact that jobs are plentiful. I think that’s good for the average American, and we should applaud that. And so they’re in good shape right now.
11. When responding to a question about the market pricing in rate cuts for next year, Jamie Dimon said forward curves have been wrong all the time
[Question] I guess just one for — a couple of follow-ups, Jeremy. In terms of the markets have gone very quickly from pricing in a ton of rate hikes to potentially pricing in rate cuts next year…
…[Answer] And I should just point out, the forward curve has been consistently wrong in my whole lifetime. We don’t necessarily make investments based on the forward curve.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Ser Jing does not own shares in any of the companies mentioned.