Are consumers . . . just fine?

Good morning. I have recovered from whatever (non-Covid) bug I caught in London. This frees me to watch the stocks go down and Treasuries go up, as the frying-pan-to-fire transition from inflation risk to recession risk continues. But it is not quite that simple, as I discuss below. Send us your thoughts: robert.armstrong@ft.com and ethan.wu@ft.com. 

Also, listen to Ethan talk stablecoins on the FT Behind the Money podcast.

Mixed messages and mixed feelings on the economy

Here is JPMorgan chief executive Jamie Dimon at the bank’s investor day on Monday:

The consumer is in very good shape even today, which means if we go into a recession, it may be different than prior recessions . . . 

Strong economy, big storm clouds. I’m calling them storm clouds because they’re storm clouds. They may dissipate. If it was a hurricane, I would tell you that, or tsunami, like we had in ‘07 or ‘08 . . . Credit looks really good. We’ve never seen it this good.

Dimon went on to note that write-offs in the card loan portfolio were running at about half the historical rate. The bank’s chief financial officer said that “we are now projecting that the unusually low level of card charge-offs will persist into next year.” Here’s the head of the consumer bank:

We are not yet seeing anything in our data, including in early delinquencies, that would point to an acceleration in credit metrics, nor are we seeing anything to suggest consumer credit behaviours have structurally changed.

Recession risk? I’m not hearing it. The chief executive of Bank of America, Brian Moynihan, seconded the motion at Davos, as CNBC reported:

“Consumers are in good shape, not overleveraged,” Moynihan, CEO of the second-biggest US bank by assets [said] . . . The bank’s customers have checking and savings accounts that are still larger than before the pandemic and are spending 10 per cent more so far in May than the year-earlier period, he said.

“What’s going to slow them down? Nothing right now,” Moynihan said.

How do we make all this giddy good cheer at America’s two biggest banks fit with the bad news we have been hearing lately? It does not chime, for example, with what we heard from Target and Walmart last week. Or the soft Amazon e-retail results prior to that. Or, for that matter, with the April new home sales figures that dropped yesterday, which suggest that the coronavirus pandemic-era housing boom was a blip:

The housing slowdown is the easiest to explain. Housing transactions are extremely rate-sensitive, and mortgage rates have gone through the roof. If you have a 3-ish per cent mortgage you took out a few years ago on your current house, and you move to a new house, you will have a 5-ish per cent mortgage, and you will be paying more, living in a less desirable house, or both. So you might decide to stay where you are, if you can.

The retail news is a little trickier, but remember the point made here last week. What happened to Walmart and Target was not primarily about consumers spending less. It was about consumers spending differently. Walmart sold fewer hard goods and more food than they expected, and was left holding too much “discretionary” goods inventory such as apparel. At Target it was the same situation, but more so.

The pessimistic read on this is that consumers are spending more cautiously, and the big box retailers didn’t see this coming in time. The optimistic read was presented neatly by Neil Dutta of Renaissance Macro Research, in an fun interview with Bloomberg’s Odd Lots. He said:

The stock market is mostly about “stuff” being sold to people and other firms. So, I can see why investors are anxious. But the economy is more about doing things for people, services in other words. And that part of the economy appears to be booming.

People are conflating a normalisation of consumption behaviour with a recession . . . search interest on Kayak has exploded as we have been pointing out. People are searching increasingly for foreign routes. That does not strike me as recession-like behaviour since flying abroad is usually more expensive than flying domestic . . . Hotel occupancy rates continue to climb. Dining out has recovered.

Certainly, some indicators suggest that Dutta is on to something here. Solita Marcelli of UBS Wealth Management points out that last quarter, per-guest spending at Disney’s US resorts was up by 20 per cent from the year before and 40 per cent above 2019 levels. Air travel is roaring back towards pre-pandemic levels:

And here is the national personal consumption expenditure index for services with price increases stripped out — that is, a quantity index of services consumption:

These data points do not capture the whole picture, though. We know that real wages are falling. We know that credit card loan volumes have topped their pre-pandemic levels, and we know the personal savings rate has fallen below them.

So it’s not all trips to Disney out there. If you ask people running services businesses and manufacturing businesses how things are going, what they tell you is not all that different. Business is still expanding, but at a diminishing rate, in both areas:

So we have reports of a strong consumer from the big banks and travel and leisure sectors; but reports of a weakening one from the big retailers and from broad macroeconomic indicators such as wages and PMIs. Splitting goods from services helps, but does not entirely square the circle. Another idea is split richer consumers from poorer ones. Here is Marcelli of UBS:

It is clear that inflation has a varying impact on different kinds of consumers. For lower income households, higher rent, food, and energy prices mean having to cut back on discretionary purchases. But homeowners sitting on a ton of equity may be less sensitive to rising prices of home improvement tools.

Indeed, cheery earnings results from Home Depot last week suggest that plenty of people are still willing to splash out on home renovations, even if building materials are expensive.

Our regular correspondent Don Rissmiller of Strategas agrees with Marcelli, and raises an interesting question. If we know some consumers are coming under stress, and those consumers’ debts are not held by the big banks, where are they held?

I do think the goods/services split matters, but . . . that’s likely not a complete explanation [of the varying consumer health indicators]. Two other things I can think of, both of which are hard to prove but might be showing up here.

First it could be the lower-income cohorts that are feeling the most impact. There are individuals that are “unbanked” in the US but still consume goods and services. Another thing might be that after a decade of stress tests, the large public banks (those making headlines) have loan books that are actually in pretty good shape. It’s someone else that’s been doing the most aggressive lending. Who that someone else is I don’t know, but that’s probably where the financial risk is.

When thinking about consumer spending, it may help to think of a four-box matrix, with “richer consumers” and “poorer consumers” across the top and “goods” and “services” down the side. The “richer-services” box is clearly booming. The other three boxes are more up in the air.

One good read

Somehow I have made it over a decade in this industry without reading Janet Malcolm’s The Journalist and the Murderer. This weekend I got around to it. I wish I hadn’t waited.