Bank executives are sounding the alarm about a weakening economy, and everyone should be taking them seriously. In the last few days, BNP Paribas, Citicorp, Goldman Sachs, HSBC, JPMorgan and Morgan Stanley have all announced either that the probability of a recession is rising or that they are downgrading American stocks from Overweight to Neutral.
It is understandable that the stock market is a big focus, because we can easily see how the escalating trade war and layoffs are affecting stock prices on a second-by-second basis. Stock market indices are leading indicators of where investors presently think the economy is headed. However, banks are not just stock investors; they also invest in bonds, and importantly, have exposure to other business lines such as investment banking, private client services, and asset management, which give them very good insight as to what is happening not just in markets, but also in the real economy. They hire numerous economists, market analysts, statisticians, traders, asset managers, and risk managers who analyze lagging, coincident, as well as leading indicators, to see how their credit and market portfolios, as well as their fee generating businesses are being impacted. These professionals are remunerated highly to use data and facts to make the right calls for the sake of the bank’s profits.
Even though today’s CPI numbers showed a slight decrease in the rate of inflation, the level is still too high. Bank stocks’ investors are telling us that they are worried about banks’ performance; in less than two weeks this month, the Dow Jones U.S. Bank Index has declined over 13%, more than double in comparison to the decline of the overall market, as evidenced by the Dow Jones Industrial Index decline of 5.6% in the same time period.
In addition to keeping an ear attune to what bank executives are saying, all of us should be looking at labor market indicators, consumer sentiment surveys, consumer default probabilities, corporate earnings, and corporate default probabilities and bankruptcy levels.
Labor Market Indicators And Consumer Sentiment
Every type of labor data in the last few weeks is telling us that the job market is getting worse. Last week, I wrote about February job cuts being the highest since the Covd-19 peak, the unemployment rate ticking up, and new job creation slowing down. Unfortunately, just in the last six days, there have been additional signs that the job market will continue to worsen:
And with the aforementioned slew of labor data, it is hard for consumers or business associations to be optimistic. Surveys released this week show Americans’ heightened anxiety.
CEOs, small businesses, and especially consumer, sentiment, should not be ignored. Consumer spending represents about 70% of gross domestic product.
Rising Consumer Defaults
Bankers are paying close attention to consumer spending, especially since last week’s Federal Reserve Consumer Credit G-19 report shows that Americans’ consumer debt continues to rise. Household debt, excluding mortgages, is now at $5 trillion dollar, about 20% higher than in 2020; the debt is comprised of loans, lines of credit, student and car loans, and credit cards.
With inflation eating at Americans’ purchasing power, wages and salaries not keeping up, and as more Americans lose their jobs, no one should be surprised that Americans will start to pay back debt late, and in worse cases default. The Survey of Consumer Sentiment is already showing that consumers’ probability of missing a minimum payment “in the next three months rose by 1.3 points to 14.6%, the highest since April 2020.” Even before this year’s tariffs and layoffs, consumers defaulted on $59 billion in credit card debt, a rise of over 30% from 2023.
Corporate Earnings Forecasts, Rising Default Probabilities, And Bankruptcies
Ominous signs from large corporations in terms of their earnings forecasts and default probabilities are also of concern.
In early March, Moody’s Asset Management Research announced that rated U.S. companies’ default risk was at 9.2%, which is a post-financial crisis high; at the peak of Covid-19, the default rate was at 7.8%. Also of concern is that U.S. corporate bankruptcies rose to a 14-year high in 2024. Now with tariffs, elevated geopolitical risks, and a weakening labor market, the default probability and bankruptcies are likely to rise.
No matter who is trying to distract the American people with comments such as ‘tariffs will bring in revenues,’ ‘no pain, no gain,’ ‘the stock market does not matter,’ or worst yet, trying to possibly change the definition of what a recession is, the data is not lying. Economic and market signals still point to the fact that a painful recession is coming.