Central U.S. banks are now reporting signs of a cooling economy in a notable shift from the robust consumer spending patterns observed over the past two years. This development comes as the Federal Reserve continues its campaign of interest rate hikes aimed at curbing inflation.
Bank of America, a bellwether for consumer financial health, has witnessed a marked deceleration in its card volume growth. CEO Brian Moynihan revealed that while retail payments surged by 11% this year, reaching nearly $4 trillion, this figure masks a recent slowdown. November’s spending increase was a mere 5%, a stark contrast to the double-digit growth in the wake of the pandemic.
The American consumer, buoyed by pandemic-era stimulus checks, wage increases, and low unemployment rates, has been a pillar of economic strength. However, this bedrock of support appears to be eroding, a development that could have far-reaching implications for corporate profits as businesses navigate the choppy waters 2023.
Wells Fargo CEO Charlie Scharf echoed these sentiments, stating unequivocally, “There is a slowdown happening, and there’s no question about it.” Scharf’s outlook for the coming year is decidedly cautious, as he anticipates “a fairly weak economy throughout the year.” However, he hoped the downturn would be “somewhat mild relative to what it could be.”
Both CEOs have aligned in their expectations of a recession in 2023. This forecast is underpinned by observable trends in consumer behavior, with Scharf noting, “We have seen certainly more stress on the lower-end consumer than on the upper end.” This disparity in financial resilience across income brackets paints a nuanced picture of the economic landscape.
The slowdown is manifesting in shifting consumer priorities. After years of pandemic-driven goods purchases and discretionary spending, there’s a noticeable pivot towards services. Scharf pointed out, “You’re seeing significant shifts to things like travel, restaurants, entertainment, and some of the things people want to do.” This reallocation of consumer dollars could reshape various sectors of the economy in the coming months.
It’s worth noting that this cooling of consumer spending aligns with the Federal Reserve’s intentions. As the central bank grapples with persistent inflation, the dampening effect on consumer activity is a desired outcome of its monetary tightening policy. Moynihan highlighted that many market forecasters anticipate the Fed’s benchmark rate to reach approximately 5% next year. However, some analysts believe even higher rates may be necessary to bring inflation to heel.
As the effects of these rate hikes permeate the economy, Moynihan observed, “You’re starting to see that slowdown take hold.” The critical question facing policymakers and business leaders is how to manage this deceleration without triggering more severe economic repercussions. “The real question will be how soon they have to stabilize that to avoid more damage,” Moynihan remarked, encapsulating the delicate balance the Fed must strike.
Bank of America’s and Wells Fargo’s experiences provide a window into the broader economic trends at play. While some companies in their client bases continue to perform well, others are grappling with challenges. This divergence underscores the uneven nature of the current economic environment and the potential for sector-specific impacts as consumer behavior evolves.
As we move into 2023, the trajectory of consumer spending will be a critical factor in shaping the economic landscape. The shift from goods to services, the disparate experiences across income levels, and the overall cooling of expenditure all point to a period of adjustment ahead. How businesses and policymakers navigate these changes will likely determine the depth and duration of any economic downturn.
With significant bank CEOs sounding cautionary notes and consumer spending patterns in flux, all eyes will be on the interplay between Fed policy, inflation, and consumer behavior in the coming months. The ability to adapt to these evolving economic conditions may well separate the winners from the losers in what promises to be a challenging year ahead.