Although Goldman Sachs economists recently raised their estimate of the risk of a recession to 35% over the next 24 months, and other experts believe it could happen even sooner, Bank of America (BAC -3.47% ) economists seem fairly confident that investors won’t see a recession in 2022 – and maybe not in 2023 either.
Bank of America CEO Brian Moynihan said economists “still have a prediction for a recession that’s around 10%, 20%.” He added: “Our economists haven’t forecast a recession for this year, it’s about 3% growth, next year just over 2%.” Here’s why Moynihan and Bank of America are pretty confident that a recession is unlikely this year.
As inflation and oil prices rise and make the cost of everything more expensive, Bank of America management pointed to numerous statistics on their first-quarter earnings call that showed just how strong the consumer is at this moment. Not only have consumers saved during the pandemic, but the added benefits of stimulus funds seem to have really bolstered their cash flow.
For the cohort of customers who had an average balance in their bank accounts of $1,400 before the pandemic, that same cohort now has an average balance of $7,400. If you move on to the next cohort that had between $2,000 and $5,000 in their Bank of America accounts, the average new balance for that cohort is $12,500. Moynihan pointed to factors such as wage growth and increased savings enabled by limited spending. In the first two weeks of April, Moynihan said spending was increasing and was 18% higher compared to the same period in April 2021.
Bank of America’s low-income consumers also appear to be in much better shape. Customers with FICO scores below 680 have credit card balances (and therefore less debt) on average 12% lower than Q1 2020 and deposit balances up 39% on average.
Bank of America’s total spending in the first quarter rose 14% year over year, the fastest growth in three years. Credit and debit spending also continued to grow across all major consumer categories year over year, and travel and entertainment spending rebounded.
Consumer credit is also incredibly strong. Credit card delinquencies at the end of the first quarter of 2022 are still well below pre-pandemic levels, as well as actual charge-offs, which is debt unlikely to be collected and a good representation of losses real on loans. Bank of America in the first quarter also released previously stored reserves for loan losses, which were offset by building up reserves for the bank’s minimal exposure to Russia and due to normal loan growth.
On the business side, Bank of America also seemed confident. Commercial loan growth in the first quarter drove total loan growth in the quarter, with commercial loans up 5% from the end of 2021, and commercial credit is as good as it gets has ever been. Bank of America Chief Financial Officer Alastair Borthwick said while commercial revolving loan utilization had reached 31.7%, the normal pre-pandemic level was 35%.
Assess where we are
Moynihan and Borthwick don’t minimize the strain on the economy from inflation, Russia’s invasion of Ukraine, and the Federal Reserve’s difficult task before trying to tame inflation by raising interest rates. interest and reducing its balance sheet without tipping the economy into a recession.
In their economic assumptions that drive all of their modeling and future forecasts, Borthwick said the bank had reduced some of its upside weighting, put more weight on the base case, and a bit more weight down, while also raising its inflation forecast.
But as Moynihan pointed out, US household deposit and cash levels are currently $3 trillion above pre-pandemic levels. It will likely take some time to drain out of the system, during which the Fed can hopefully stage a soft landing. Although the economic uncertainty is exorbitant, I find it unlikely – barring extreme events – that the economy will tip into a recession this year considering the strength of American consumers and the business community. right now.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.