Wells Fargo and Citi customers are still spending

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If everyone is feeling so miserable, why do they seem to be having a good time? This is the puzzle of comparing US bank results in the second quarter with the terrible readings of recent consumer sentiment surveys.

Citigroup Inc. customers are spending freely on restaurants and vacations, driving credit card volumes up 18% from a year earlier, the bank said in its earnings report Friday. . Wells Fargo & Co. also cited travel and entertainment in card spending growth in its results. JPMorgan Chase & Co. said much the same thing the day before.

Some discretionary spending is down: Wells Fargo said debit cardholders were buying fewer clothes and doing fewer home renovations. High inflation is also a factor, noted Citigroup chief financial officer Mark Mason. Things like fuel and flights cost more. But as Mason said, welfare leisure spending is hard to square with worries about rising costs of living and sharply falling consumer expectations about income and employment in surveys from the Conference Board this year.

Maybe people are just having nihilistic fun before the storm hits. Wells Fargo said spending slowed a bit in May and June, so some consumers may already be wrapping up and heading home. But the three banks also said consumers still had good cash reserves and the flexibility to spend what they wanted. None of the banks are yet seeing signs of stress among borrowers either. Provisions for bad debts are rising, but that’s largely due to loan growth, not more people delaying repayment.

Low-income households are likely to suffer more, and the pain of gas and grocery costs will continue to escalate for them. But this is more of a problem for society than for the banks. Low-income borrowers simply don’t make up a big chunk of the lending books at banks like Wells Fargo, said Mike Santomassimo, its chief financial officer.

As for what could change, the key factor to watch is employment. Bank results raised red flags in two areas investors should watch: construction and highly indebted companies.

Wells Fargo reported a slump in its mortgage-related business on Friday, with second-quarter revenue down 53% from the same period last year and 35% from the first quarter. On Thursday, JPMorgan reported that mortgage income fell 31% year over year. It has already started laying off hundreds of mortgage workers, Bloomberg News reported last month. Sales of new and existing homes have both fallen sharply this year due to rising interest rates, while total construction spending fell slightly in May for the first time since September 2021, data from the Federal Reserve Bank of St. Louis. If people don’t buy new houses, construction work will obviously suffer. The decline in home improvement spending seen by Wells Fargo is closely tied to the same trend. When Goldman Sachs reports on Monday, its recently acquired GreenSky lending business could also suffer.

The other area that could hurt employment is as companies begin to struggle with their debt burden. The first place to look is among those whose funding comes from the floating rate high yield loan market. Investors fled this market, driving up borrowing costs on top of the effect of already rising base interest rates. For banks, the first pain of this situation was visible in the write-offs they took on leveraged loans they were unable to sell. Wells Fargo suffered a hit of $107 million in the second quarter, while Citigroup’s was $126 million. JPMorgan announced a markdown of $257 million on Thursday.

Bankers don’t expect this activity to pick up much over the rest of this year, which is bad for their investment banking fees. But it also makes it much harder for heavily indebted companies to refinance loans or reorganize their financing structure if they start to struggle with the cost of debt.

JPMorgan, Citi and Wells Fargo appear to be in pretty good shape when it comes to the health of Main Street lending and spending. But look closely and there are signs in the banks’ results of what could go wrong in the economy. Consumers look healthy even though they say they are unhappy. This puzzle will eventually be solved one way or another.

More writers at Bloomberg Opinion:

• JPMorgan’s bad earnings news really isn’t that bad: Paul J. Davies

• Inflation is even worse if you measure it correctly: Justin Fox

• Private equity takes a risky bet on stagflation: Chris Hughes

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

More stories like this are available at bloomberg.com/opinion