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 first quarter of 2024 – was held two weeks ago and contained useful insights on the state of American consumers and businesses. The bottom-line is this: Economic indicators in the US continue to be favourable and American consumers are in good shape, but there are a number of risks on the horizon, so JPMorgan’s management is preparing for a wide range of outcomes.
What’s shown between the two horizontal lines below are quotes from JPMorgan’s management team that I picked up from the call.
1. Management sees economic indicators in the USA as favourable, but there are many risks on the horizon (including geopolitical conflicts, inflationary pressures, and the Fed’s quantitative tightening) so they want to be prepared for a range of outcomes; the economy always looks healthy at the inflection point; management thinks the US economy will be affected even if problems happen elsewhere
Many economic indicators continue to be favorable. However, looking ahead, we remain alert to a number of significant uncertain forces. First, the global landscape is unsettling – terrible wars and violence continue to cause suffering, and geopolitical tensions are growing. Second, there seems to be a large number of persistent inflationary pressures, which may likely continue. And finally, we have never truly experienced the full effect of quantitative tightening on this scale. We do not know how these factors will play out, but we must prepare the Firm for a wide range of potential environments to ensure that we can consistently be there for clients…
…But what I caution people, these are all the same results [referring to the comments in Point 2 and Point 6 below about consumers and businesses being in good shape] of a lot of fiscal spending, a lot of QE, et cetera. And so we don’t really know what’s going to happen. And I also want to look at the year, look at 2 years or 3 years, all the geopolitical effects and oil and gas and how much fiscal spending will actually take place, our elections, et cetera. So we’re in good — we’re okay right now. It does not mean we’re okay down the road. And if you look at any inflection point, being okay in the current time is always true. That was true in ’72, it was true in any time you’ve had it. So I’m just on the more cautious side that how people feel, the confidence levels and all that, that doesn’t necessarily stop you from having an inflection point. And so everything is okay today, but you’ve got to be prepared for a range of outcomes, which we are…
…I think that when we talk about the impact of the geopolitical uncertainty on the outlook, part of the point there is to note that the U.S. is not isolated from that, right? If we have global macroeconomic problems as a result of geopolitical situations, that’s not only a problem outside the U.S. That affects the global economy and therefore the U.S. and therefore our corporate customers, et cetera, et cetera.
2. Management is seeing consumers remain healthy with overall spend in line with a year ago, and although their cash buffers have normalised, they are still higher than pre-COVID levels; management thinks consumers will be in pretty good shape even if there’s a recession; the labour market remains healthy with wages keeping pace with inflation
Consumers remain financially healthy, supported by a resilient labor market. While cash buffers have largely normalized, balances were still above pre-pandemic levels, and wages are keeping pace with inflation. When looking at a stable cohort of customers, overall spend is in line with the prior year…
… I would say consumer customers are fine. The unemployment is very low. Home price dropped, stock price dropped. The amount of income they need to service their debt is still kind of low. But the extra money of the lower-income folks is running out — not running out, but normalizing. And you see credit normalizing a little bit. And of course, higher-income folks still have more money. They’re still spending it. So whatever happens, the customer’s in pretty good shape. And they’re — if you go into a recession, they’d be in pretty good shape.
3. Auto originations are down
And in auto, originations were $8.9 billion, down 3%, while we maintained healthy margins and market share.
4. Net charge-offs (effectively bad loans that JPMorgan can’t recover) rose from US$1.1 billion a year ago, mostly because of card-related credit losses that are normalising to historical norms; management expects consumer-spending on credit/debit cards to have strong growth in 2024
In terms of credit performance this quarter, credit costs were $1.9 billion, driven by net charge-offs, which were up $825 million year-on-year predominantly due to continued normalization in Card…
…And in Card, of course, while charge-offs are now close to normalized, essentially, we did go through an extended period of charge-offs being very low by historical standards, although that was coupled with NII also being low by historical standards…
….Yes, we still expect 12% card loan growth for the full year.
5. The level of appetite that companies have for capital markets activity is uncertain to management
While we are encouraged by the level of capital markets activity we saw this quarter, we need to be mindful that some meaningful portion of that is likely pulling forward from later in the year. Similarly, while it was encouraging to see some positive momentum in announced M&A in the quarter, it remains to be seen whether that will continue, and the Advisory business still faces structural headwinds from the regulatory environment…
…Let me take the IPO first. So we had been a little bit cautious there. Some cohorts and vintages of IPOs had performed somewhat disappointingly. And I think that narrative has changed to a meaningful degree this quarter. So I think we’re seeing better IPO performance. Obviously, equity markets have been under a little bit of pressure the last few days. But in general, we have a lot of support there, and that always helps. Dialogue is quite good. A lot of interesting different types of conversations happening with global firms, multinationals, carve-out type things. So dialogue is good. Valuation environment is better, like sort of decent reasons for optimism there. But of course, with ECM [Equity Capital Markets], there’s always a pipeline dynamic, and conditions were particularly good this quarter. And so we caution a little bit there about pull-forward, which is even more acute, I think, on the DCM [Debt Capital Markets] side, given that quite a high percentage of the total amount of debt that needed to be refinanced this year has gotten done in the first quarter. So that’s a factor.
And then the question of M&A, I think, is probably the single most important question, not only because of its impact on M&A but also because of its knock-on impact on DCM through acquisition financing and so on. And there’s the well-known kind of regulatory headwinds there, and that’s definitely having a bit of a chilling effect. I don’t know. I’ve heard some narratives that maybe there’s like some pent-up deal demand. Who knows how important politics are in all this. So I don’t know.
6. Management is seeing that businesses are in good shape
Businesses are in good shape. If you look at it today, their confidence is up, their order books drop, their profits are up.
7. Management thinks that the generally accepted economic scenario is nearly always wrong and that no one can accurately predict an inflection point in the economy
And the other thing I want to point out because all of these questions about interest rates and yield curves and NII and credit losses, one thing you projected today based on what — not what we think in economic scenarios, but the generally accepted economic scenario, which is the generally accepted rate cuts of the Fed. But these numbers have always been wrong. You have to ask the question, what if other things happen? Like higher rates with this modest recession, et cetera, then all these numbers change. I just don’t think any of us should be surprised if and when that happens. And I just think the chance of that happen is higher than other people. I don’t know the outcome. We don’t want to guess the outcome. I’ve never seen anyone actually positively predict a big inflection point in the economy literally in my life or in history.
8. Management thinks the US commercial real estate market is fine, at least when it comes to JPMorgan’s portfolio; management thinks that if interest rates rise, it could be roughly neutral or really bad for the real estate market, depending on the reason for the increase in interest rates
First of all, we’re fine. We’ve got good reserves against office. We think the multifamily is fine. Jeremy can give you more detail on that if you want.
But if you think of real estate, there’s 2 pieces. If rates go up, think of the yield curve, the whole yield curve, not Fed funds, but the 10-year bond rate, it goes up 2%. All assets, all assets, every asset on the planet, including real estate, is worth 20% less. Well obviously, that creates a little bit of stress and strain, and people have to roll those over and finance it more. But it’s not just true for real estate, it’s true for everybody. And that happens, leveraged loans, real estate will have some effect.
The second thing is the why does that happen? If that happens because we have a strong economy, well, that’s not so bad for real estate because people will be hiring and filling things out. And other financial assets. If that happens because we have stagflation, well, that’s the worst case. All of a sudden, you are going to have more vacancies. You are going to have more companies cutting back. You are going to have less leases. It will affect — including multifamily, that will filter through the whole economy in a way that people haven’t really experienced since 2010. So I’d just put in the back of your mind, the why is important, the interest rates are important, the recession is important. If things stay where they are today, we have kind of the soft landing that seems to be embedded in the marketplace, everyone — the real estate will muddle through.
9. Consumers whose real incomes are down are slowing their spending, but they account for only a small proportion of the overall population, and they are not levering up irresponsibly
And there are some such people whose real incomes are not up, they’re down, and who are therefore struggling a little bit, unfortunately. And what you observe in the spending patterns of those people is some meaningful slowing rather than what you might have feared, which is sort of aggressive levering up. So I think that’s maybe an economic indicator of sorts, although this portion of the population is small enough that I’m not sure the read-across is that big. But it is encouraging from a credit perspective because it just means that people are behaving kind of rationally and in a sort of normal post-pandemic type of way as they manage their own balance sheets.
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