Bank CEOs becoming more pessimistic about the U.S. economy

The outlook for the U.S. economy from Wall Street's biggest banks is getting gloomier, with many top executives saying they're preparing for a potential recession.

Following the short but potent pandemic recession in 2020, bank CEOs have spent the past year and a half trumpeting the strength of the economy and the resilience of the American consumer. Many did so again Friday after reporting quarterly results, but this time with an overriding sense of caution.

"We recognize the pressure points are building in several areas of the economy that could lead to stress in the future," said Andy Cecere, CEO of U.S. Bank.

Such comments reflect the growing evidence that the U.S. and global economy is weakening in the face of worldwide inflation and the war in Ukraine. 

Half a dozen banks reported their quarterly results on Friday, ranging from behemoths JPMorgan Chase and Citigroup to regional banks like U.S. Bank and PNC Financial. 

On one hand, the banks noted a low level of delinquencies, solid consumer spending and healthy activity among their business clients. At the same time, they acknowledged multi-decade high levels of inflation, a housing market that is slowing down quickly, and a Federal Reserve that is raising rates at an unprecedented pace.

Banks bracing for impact

"Inflation is casting a long shadow on these banks' future outlooks," said Peter Torrente, U.S. national sector leader for banking and capital markets at accounting giant KPMG.

Inflation has been persistently high for months, with this week's reading of consumer prices showing an 8.2% rise in costs in September from a year earlier. Fed officials have pushed up their short-term rate by a hefty three-quarters of a percentage point three times in a row, bringing it to a range of 3% to 3.25%, the highest in 14 years. 

Reflecting the dimmer macroeconomic view, Citigroup, Wells Fargo and JPMorgan socked away cash in their loan-loss reserves. During the pandemic, banks put tens of billions of dollars into these reserves but had released the bulk of those funds in 2021 reflecting the improvement in the economy.

Now the banks are again fortifying the reserves. JPMorgan set aside roughly a $1 billion in its loan loss reserves, while Citigroup and Wells both roughly put $400 million into their reserves this quarter. The pace of additions is slower than at the onset of pandemic when, for example, JPMorgan put more than $10 billion into its reserves in one quarter.

Wells Fargo CEO Charlie Scharf told investors on a conference call that the bank expects broader economic conditions to weaken, resulting in increases in delinquencies and credit losses.

"While the backdrop is favorable today, it would not be surprising to us to see an economic slowdown develop at some point driven by lower confidence levels, which may lead to reduced spending and business investment," Cecere said.

JPMorgan Chase CEO Jamie Dimon said Monday there's a "very, very serious" mix of concerns could lead to a recession in the next six to nine months. 

One thing supporting Dimon's comments is the amount of spending consumers are doing with their credit cards. Wells Fargo, Citigroup and JPMorgan all reported double-digit increases in consumer credit card spending compared to a year earlier.

While JPMorgan executives said that some of that spending might be consumers returning to pre-pandemic spending trends, inflation might simply be stretching household budgets.