U.S. consumer spending has benefited from strong wage growth and low unemployment so far, but it faces huge risks, bank executives warned, if the upheaval sparked by President Donald Trump's trade policy persists.
While the steep tariffs on the trading partners of the U.S. have raised fears of price hikes, a low unemployment rate of 4.2% and a 3.8% annual wage growth in March are offering some relief to consumers.
"By far the most important variable is unemployment. If the labor market remains very strong, consumer credit will probably be fine," JPMorgan Chase's (JPM.N) Chief Financial Officer Jeremy Barnum said last week.
The comments mark a rare note of optimism in recent weeks, hinting that a recession can be averted if consumer spending remains at the current level.
"Our clients continue to show encouraging signs," Bank of America (BAC.N) CFO Alastair Borthwick said on Tuesday. "The signals at this point from the consumer are that the U.S. economy still remains in good shape."
JPMorgan last week kept its card services net charge-off rate, or the share of credit card debt it does not expect to recover, unchanged at 3.6%, while Bank of America said net charge-offs in the quarter were flat.
POCKETS OF STRESS
Part of the spending momentum, however, could be short-lived as some consumers are pre-purchasing goods likely to get pricier after the tariffs.
"I've seen evidence of companies specifically advertising pre-tariff inventory.... Looking at the April data, we're seeing what would appear to be a little bit of front-loading of spending," Barnum said.
Households are also grappling with a record $18.04 trillion of debt, according to a report from the Federal Reserve Bank of New York, which may reduce their ability for discretionary purchases.
The resumption of student loan repayments could also exert pressure, according to analysts at Morningstar DBRS.
A U.S. appeals court in February ruled the previous Biden administration lacked authority to pursue a student debt relief program designed to lower monthly payments for millions of borrowers and speed up loan forgiveness for some.
Any additional strain could weigh especially on lower-income households. Wells Fargo (WFC.N) chief Charlie Scharf recently warned that less affluent customers were showing signs of stress.
The White House has so far pushed back against recession talk despite some predictions of a contraction in gross domestic product in the first quarter and concerns about inflation.
JPMorgan CEO Jamie Dimon said the bank's economists estimate a 50% chance of a recession, while Goldman Sachs (GS.N) chief David Solomon said prospects of a recession had increased.
The Bureau of Economic Analysis will release the advance estimate of first-quarter GDP report on April 30, which could offer fresh clues about the U.S. economy.
