The economic impact of the Fed’s quantitative tightening was on full display this week as three of the world’s largest commercial banks, and one of the world’s top investment banks, issued quarterly earnings on Friday. Thematically, all four releases read like a rigged version of the kid’s game ‘Which One Doesn’t Belong’ – they were practically identical. In sum, allocations to loss provisions were up, investment banking revenue was down, and all saw tremendous growth in net interest income (NII), stemming directly from the Fed’s catch-up contractionary action of jacking-up the discount rate. The NII numbers were especially eyebrow-raising. On a same quarter, YOY basis, Citigroup was up 18%, JPMorgan 34%, Wells Fargo 36%, and Morgan Stanley a whopping 46%.
But there was another theme in the releases that caught my attention, relating to the financial condition of the U.S. consumer, who for better or for worse, has become the putative underpinning of the global economy. In each release, including earnings calls, there was some reference to the “historically low” delinquency rates of secured and unsecured consumer loans. In and of itself, this data seems like a net positive when contextualized within the negative and chaotic macroeconomic backdrop of rising interest rates and inflation. But within the context of two other consumer-centric, economic indicators, it evokes a more Churchhillian notion of the economic health of the U.S. consumer – a riddle, wrapped in a mystery, inside an enigma….or in this instance, an onion
Let’s peel back a couple of more layers.
For one, the consumer savings rate is down 63.16% from the same time last year. And two, consumer sentiment, as measured by the University of Michigan Surveys of Consumers, is down 16.60% YOY. These two indicators typically operate with a negative correlation – when consumers feel “good” about their economic prospects, they spend more, and save less. That these two are operating with a positive correlation suggests something anomalous is at work.
For my part, there is a sensible explanation for what seems to be an economic mystery regarding the financial health of the U.S. consumer. The positive correlation between consumer sentiment and savings rate – both of them down – can be reconciled if one takes into account the increased household spend caused by the heretofore, not discussed, macro-headwind of inflation.
The takeaway? The U.S. consumer has a bleak economic outlook, but it’s spending more and saving less because of the rising cost of goods and services.
But this doesn’t explain the other part of the mystery – how the consumer can be spending more, saving less, and still be paying its debt obligations on time?
The most likely explanation for this is that the U.S. consumer still has a healthy balance sheet leftover from the government fiscal stimulus distributed during, and after, the pandemic.
Is this sustainable? Not likely.
To paraphrase JP Morgan CEO, Jamie Dimon’s comments at the Institute of International Finance’s Annual Membership Meeting this Thursday, the economic challenges facing the U.S. are analogous to Dicken’s “A Tale of Two Cities”, with a more prosperous situation giving way to a darker economic place in 2023, “One city is now, with a strong consumer spending 10% more than last year….They can do that for about nine more months.”
