Bank Of America Says Credit Data Doesn’t Signify A Recession

Key takeaways

• On Friday, the BLS reported that May inflation increased 8.6% year-over-year, marking the fastest inflation growth since 1981
• On Monday, the Bank of America’s Chief Financial Officer reported that customer spending is up 9% in the year to June despite lower credit card balances than this time last year
• These numbers suggest that an upcoming recession is, by no means, a certainty

The stock market panicked Friday after the release of last month’s inflation report, which showed May prices rising 8.6% year-over-year. Even when excluding food and energy prices, which tend to fluctuate more, annual inflation sat at a robust 6%.

Each of the major stock indices slumped Friday on the news. By Monday’s close, stocks had plunged even further, officially dragging the S&P 500 into bear market territory.

Inflation began rising last year after the pandemic economy reopened and supply chain snarls snaggled various markets. Now, almost a year since the first echoes of inflation tickled the economy, we’re barreling along at the fastest rate seen since 1981.

To combat this 40-year-high price growth, the Federal Reserve has already instituted 0.25% and 0.5% rate hikes this year. But now, after stating that higher hikes weren’t in the cards, it’s looking increasingly likely that the Fed could spike rates an additional 0.75% this week.

Unfortunately, all these inflationary pressures, interest rate hike fears and uncertainty stemming from the Russia-Ukraine war have taken their toll. Despite a tight labor market, many consumers aren’t feeling too happy about current economic conditions. Many—consumers, investors and analysts alike—have worries about a potential recession on the horizon.

But this week, the Bank of America offered some comforting words: At the moment, a full-blown recession may not be as likely as many believe.

Bank of America warns of recession but takes a positive stance

The Bank of America’s earlier sentiments trickled out Friday, courtesy of Chief Investment Strategist Michael Hartnett. According to Hartnett, the bank’s in-house bull and bear indicator resides deep in “contrarian bullish” territory. Hartnett also noted that, “we’re in a technical recession [now], but just don’t realize it.”

Hartnett’s take on current consumer data and household balance sheets indicates that a “shallow” recession lies ahead. He counted price spikes in food, natural gas (and other energy sources) and housing among those leading the inflation charge.

But on Monday, the Bank of America’s Chief Financial Officer Alastair Borthwick offered a more comforting message. According to numbers in the bank’s loan and credit portfolio, there’s no substantial signs of a looming recession.

Borthwick counted among his evidence the fact that customer spending is up 9% in June compared to last year’s number. And the bank’s corporate clients haven’t halted borrowing activities, with “reasonably good loan growth” seen across the board.

Despite ongoing spending, credit card balances remain lower now than they did pre-pandemic, suggesting that consumers aren’t over-extending their budgets.

Borthwick said: “There’s this question of what will happen in the future, and there’s what we are seeing right now. And what we’re seeing right now, credit is in great shape.”

At the same time, the bank’s retail customers continue to store cash rather than spend it. He gave the example of customers who maintained account balances around $1,000-$2,500 pre-pandemic now hoarding around seven times that amount.

All told, the bank continues to see “very healthy balance sheets and healthy spending.”

And coming from the second-largest U.S. bank (by assets), these numbers paint a more uplifting picture of the economy than others have in recent weeks.

Other banks say at least a small recession is likely

Borthwick’s comments contrast with the views of JPMorgan Chief Executive Officer Jamie Dimon. Dimon noted earlier this month that factors like high inflation and the Russia-Ukraine conflict are like a “hurricane” on the road ahead.

Meanwhile, executives at a Morgan Stanleyfinancial industry conference took a more middling view. The broad consensus was that U.S. consumers and companies remain strong financially, which will allow them to weather a contraction and recover strongly. However, that doesn’t mean that a recession isn’t possible – simply that the economy won’t stay stuck in a deep rut.

For instance, Morgan Stanley CEO James Gorman noted that there’s a “possible” recession ahead, setting the odds at “50-50.” This is a revision of his own former forecast, where he set the likelihood of a recession around a 30% chance.

Gorman noted: “I think eventually the Fed will get hold of inflation. It’s going to be bumpy… But we’re unlikely at this stage to go into a deep or long recession.”

And, like Borthwick, Gorman believes that consumer and corporate balance sheets remain “very strong,” and that he doesn’t think the economy will fall into “some massive hole” in the near future.

This sentiment echoes Goldman Sachs’ previously-stated position that a U.S. recession is not inevitable—despite what the stock market might suggest. Chief Economist Jan Hatzius stated in a client note: “While our growth forecast has long been below consensus, we believe fears of declining economic activity this year will prove overblown unless new negative shocks materialize.”

In other words, though Goldman Sachs sees a “deceleration” in the cards, a “collapse” is not yet on the table.

Recession or not, Q.ai’s got you covered

It’s no small matter that top executives at two of Wall Street’s biggest banks remained positive in the face of scary inflation data this week. But that doesn’t mean you shouldn’t prepare yourself for the possibility that a recession could occur, no matter how mild.

That’s why, recession or no recession, Q.ai has got your back. With a wide variety of AI-backed Investment Kits to choose from, you can buffer your portfolio from multiple angles.

For instance, take stock in our Large Cap Kit, which is designed to help investors benefit from the long-term macro view that U.S. GDP growth will be slow. It’s also designed to appreciate in value whichever way the markets move—just so long as small-cap companies continue to underperform larger ones (as they tend to do in these environments).

There’s also the Inflation Kit, which can help protect your portfolio against rapidly rising prices. And to cap it all off, you can rest easy investing with Portfolio Protection, which adds an extra layer of financial security during these turbulent times.

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