Is it a Soft Landing or a Hard Landing? The Bank Results Show a Path to No Landing

For several months, economists, investors, and business leaders have been engaged in discussions about whether the economy is heading toward a soft landing or a hard landing. However, there is another perspective to consider: the possibility of a "no landing" scenario, where the economy continues to grow at a stable or even improved pace without significant slowdowns.

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Recent statements from bank executives indicate that some recent trends of slowing consumer and business activity may not necessarily predict future declines but could be remnants of past behaviors. For instance, JPMorgan Chase and Wells Fargo reported a slowdown in credit card spending growth and an uptick in late payments. JPMorgan’s card services saw sales volume increase by just under 7% compared to the previous year, down from nearly 8% in the second quarter and over 9% in the first.

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At first glance, this decline may suggest a deceleration of economic activity, though it could be a gentle slowdown. However, JPMorgan's Chief Financial Officer, Jeremy Barnum, emphasized the importance of framing these spending patterns within the context of the pandemic and its aftermath. “We’re reaching a point where discussing the pandemic seems less relevant,” Barnum remarked, suggesting that this is likely one of the last times such comparisons will be made.

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During the pandemic, there was a significant shift in consumer behavior, with increased spending in travel and entertainment as individuals began to venture out and indulge in experiences they had missed during lockdowns. “People traveled extensively and booked cruises they hadn’t considered before, and dining out became very common,” Barnum noted. This trend is now settling into more typical patterns.

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A decline in discretionary spending might usually indicate a shift towards necessities—such as fuel or groceries—which often signals that consumers are bracing for tougher economic times. However, JPMorgan’s data contradicts this notion, revealing no significant reduction in retail spending. Barnum stated, “Overall, spending patterns appear robust and align with the idea that consumers are in a strong position, reflecting a solid labor market and the current assumption of a no-landing scenario.”

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Furthermore, some aspects of consumer credit issues can be attributed to the unusual economic conditions of recent years. Lenders have pointed out that certain lending vintages from 2021 and 2022—when many borrowers were financially cushioned by government stimulus and low interest rates—have exhibited some of the worst credit performance. Under these circumstances, some borrowers gained access to credit that they may not have qualified for otherwise. Nonetheless, the overall quantity of loans affected by this situation appears manageable.

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For those customers struggling to keep up with payments, there are signs that conditions may improve. Wells Fargo's CEO, Charlie Scharf, mentioned that “as inflation slows and interest rates begin to ease, these changes should benefit all customers, particularly those with lower incomes.”

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Analyzing banks’ figures in the context of the economy is essential. For example, in commercial lending, a rise in alternative borrowing methods can lead to a perception of weak loan growth among banks. JPMorgan noted promising trends in new loan originations in the multifamily commercial real estate sector, aided by declining long-term interest rates. However, overall lending growth could remain subdued as older loans begin to mature.

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Time also plays a crucial role. As the presidential election approaches and if interest rates decline, these factors could bolster client confidence, leading to increased investments in inventories or capital expenditures that are currently on hold, according to Wells Fargo’s CFO, Michael Santomassimo.

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Interestingly, the rise in credit card charge-off rates might signal a positive trend for the economy—namely, the relaxation of credit conditions. JPMorgan reported that its anticipated card net charge-off rate this year, projected at around 3.4%, falls below the long-term targets for underwriting new card debt. This situation allows the bank to extend credit to a broader array of customers or enable existing customers to borrow slightly more, maintaining profitability despite potential increases in defaults.

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Both Wells Fargo and JPMorgan continue to target solid growth in their credit card sectors. Despite expectations that lower interest rates may limit the banks’ net interest income through 2025, JPMorgan indicated that by mid-next year, growth in revolving card balances could contribute positively to their financial performance. Additionally, both banks continue to innovate, with Wells Fargo recently launching new travel-reward credit cards in partnership with Expedia Group.

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In essence, the concept of a "no landing" scenario suggests that the economy may indeed be capable of sustaining its current trajectory, promoting ongoing growth without the need for a dramatic shift or downturn.

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