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Banking analysts and investors worry about spending outlook as inflation risks rise

U.S. consumer spending has been rising for months as the country emerges from the COVID-19 pandemic and Americans make up for lost time traveling, shopping and eating out, according to bankers and economists.

Despite this momentum, there are signs that the end of pandemic-era financial aid and 40-year-old inflation, exacerbated by Russia’s invasion of Ukraine, are beginning to hurt to the finances of low-income Americans.

Executives from JPMorgan Chase & Co, Bank of America and Wells Fargo & Co, which together make up about half of American households, have been saying for months that the American consumer is in good health, spending more and using balances. his accounts, which have increased during the pandemic, to pay off his credit cards and other debts.

So far, they say, consumer spending appears to be holding up. But the outlook for income growth and the reality of rising costs for consumer staples spell trouble.

Bank of America, the second-largest U.S. bank, said its customers spent $63 billion in February on debit and credit cards, 21% more than a year ago, with more spending levies for travel, meals, public transport and gym memberships.

“We saw a strong continuation of payment and spending trends in February,” said Mary Hines Droesch, head of consumer and small business products at Bank of America. “(The data) suggests that more consumers are returning to the office and resuming their in-person activities.”

U.S. retail sales in February rose more than 17% from a year ago, although month-on-month growth slowed slightly as Americans returned from a spending spree in January , according to data from the US Department of Commerce.

“Despite record inflation and consumer sentiment at an 11-year low, US consumption, particularly retail sales, has shown resilience,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

Consumer behavior has been supported by a tight labor market, excess savings and “strong household balance sheets”, she added.

More data will be available on April 13, when JPMorgan kicks off earnings season, followed by Wells Fargo on April 14 and Bank of America on April 18.

As people revert to old spending habits, confidence in their prospects for a significant increase in income over the next two years is at an eight-year low, according to data from the University of Michigan, and economists say real incomes, a more specific measure of wealth, are collapsing.

Jason Briggs, economic analyst at Goldman Sachs, predicts that real household income will grow only 0.5% in 2022, and that the income of the lowest earners will decline this year due to inflation and the end of government aid.

“The biggest headwind to real spending growth in 2022 is very weak real income growth,” Briggs wrote in a statement to investors last week.

One area of ​​lending – cars – is seeing an increase in defaults from borrowers who have the lowest credit quality.

Defaults on auto loans rose in February for the ninth consecutive month, led by risky borrowers, according to a report by Manheim Consulting. The report also indicates that the percentage of subprime auto loans in serious default is its highest level since 2006, although the proportion of all subprime loans is near its lowest level.

Last week, the New York Federal Reserve identified another possible reason for trouble on the horizon: 37 million federal student loan borrowers will have to start making payments again starting in May.

Payments on federal student loans have been suspended since March 2020, when the government temporarily placed these loans on administrative suspension.

Meanwhile, the 10 million borrowers with private student loans who had to continue making payments “struggled with their debt,” New York Fed research analysts wrote.

“The difficulties encountered by these borrowers in managing their (private) student loans and other debts suggests that (federal student loan) borrowers will face increased defaults once administrative forbearance ends and payments will resume,” the New York Fed researchers wrote in a blog post.

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