As big banks report their second-quarter earnings, those reports could hold a clue as to whether or not a recession is on the horizon, contends an article in The Wall Street Journal. Bank executives generally have good insight into how healthy the U.S. economy is, based on their clients’ bank accounts. And though the first quarter did carry some positives—plentiful jobs and consumer spending—it was also hit by the highest inflation in 40 years, and a recent survey from JPMorgan shows a mere 19% of leaders of midsize businesses have a positive view of the economy.
At the end of the first quarter, JPMorgan also took the unexpected step of putting aside $900 million as a bolster against future economic weakness. If other banks do the same this quarter, it could be a sign that they’re preparing for a recession they believe is definitely coming. Regardless, given that earnings were so strong a year ago, they will likely be lower this time around.
In spite of raging inflation, consumers were still spending on their credit cards during the first quarter, but that confidence has started to wane as inflation persists and food and energy prices remain high. People are starting to dip into the cash reserves they stockpiled during the pandemic in order to cover household expenses. Interest rates have also jumped in the second quarter; that’s usually a boon for banks, but now it’s turning investors away as they fear the rate hikes will result in a recession. Indeed, the KBW Nasdaq Bank Index is down 23% so far in 2022. Lending, however, has picked up, with commercial and industrial loans at U.S. banks nearing $2.7 trillion at the end of June, though mortgage lending has slowed.
As for investment banking, Wall Street in general seems to have fallen back to the ground after soaring through pandemic highs. Merger and acquisition activity is down 24% from last year, and initial public offerings have come to a standstill. But all the volatility in the stock, bond, and commodity markets may actually provide a boost to trading desks: trading revenue is forecasted to go up 15-20% at JPMorgan, and Citigroup predicts their trading revenue to rise more than 25%.