CAPITALI$M IS DEBT AND CONSUMPTION

Dimon: The excess savings amassed by low-income consumers are now gone

JPMorgan Chase (JPM) CEO Jamie Dimon sees a divergence between the two ends of his customer base, with lower-income consumers running out of a cash cushion they amassed during the pandemic.

“They don't have excess savings anymore,” said JPMorgan Chase CEO Jamie Dimon in a interview with Yahoo Finance on Wednesday night where he discussed topics ranging from geopolitics to the future direction of interest rates.

Executives from other banks view it the same way, noting that lower-income consumers are feeling more pain on several fronts. Wells Fargo’s CEO of consumer lending, Kleber Santos, called it a "tale of two cities" on Thursday.

Middle- and upper-class customers are "performing quite well" while there are "signs of stress" among those with lower incomes, Santos said while speaking at a BancAnalysts Association of Boston conference. "That’s where the deterioration is mostly."

Wells Fargo bank branch in Beverly Hills, Calif. (PATRICK T. FALLON/AFP via Getty Images) (PATRICK T. FALLON via Getty Images)

As a result, he said, Wells (WFC) is becoming "more conservative" on extending loans to that income segment, and not originating subprime loans "anywhere, any asset class, nothing."

The strength of the US consumer is a subject of debate across the financial world at a time when economic data has been coming in largely stronger than expected despite the Federal Reserve’s interest rate hiking campaign as the central bank seeks to cool inflation.

The Fed on Wednesday maintained its benchmark interest rate in a range of 5.25%-5.50%, the highest in 22 years, while leaving the door open for further action as officials work to bring inflation back to the central bank's 2% target.

The Fed also upgraded its assessment of the economy to "strong" in the third quarter from "solid" in September, a change that comes after third quarter GDP data published last week showed growth clocked in at a whopping 4.9% annualized rate over the summer months. That was driven in large part by strong consumer spending.

Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday. (Susan Walsh/AP Photo) (ASSOCIATED PRESS)

"We may have underestimated the balance sheet strength of households and small businesses," Fed Chair Jerome Powell said at a press conference Wednesday while discussing the strength of the consumer.

"The question is how long can that continue."

As of the end of the second quarter, total US credit card debt crossed $1 trillion as delinquency rates edged closer to pre-pandemic levels, according to a household debt and credit report from the Federal Reserve Bank of New York. On Tuesday the New York Fed will release third quarter results.
What the market is 'most worried about'

Several other banks have offered warnings about slowing consumer spending while releasing their third quarter earnings in recent weeks, highlighting the pain they see among the lower end of their customer bases.

Citigroup (C) CEO Jane Fraser said affluent customers are accounting for almost all of the spending growth, and weakness is showing among those with lower credit scores. Citi expects its credit card losses to reach pre-COVID levels by the end of the year.

Jane Fraser, CEO of Citigroup. (Mike Blake/REUTERS) (Mike Blake / reuters)

Bank of America (BAC) CEO Brian Moynihan said its consumer bank balances are still above pre-pandemic levels but they are coming down. In late September, he said the bank's consumers were spending at pre-pandemic rates "consistent with 2016, 2017, 2018."

Fifth Third (FITB) executives also cited more economic pain among lower-end subprime borrowers. And that, according to Fifth Third CEO Tim Spence, is what the market is "most worried about right now."

Capital One (COF) CEO Richard Fairbank said spending and delinquencies among lower-end consumers, which the bank saw rising in past quarters, is beginning to stabilize, but now higher-income customers are starting to follow the same downward trend.

"Our upmarket segments are sort of just a little bit behind," he said.

'There are a lot of different ways to measure it'

To be sure, Dimon told Yahoo Finance that overall the consumer "is in very good shape," and that if the economy does go into recession "the consumer is going in better shape than they gone in most recessions."

At the same time, the boss of the largest US bank said the lower third of consumers who have accounts with the largest US bank have run out of their excess savings amassed during the pandemic.

The middle class is getting close to zero, he said, with no excess savings. "But they still have jobs and wages are going up."

The wealthy, he added, “still have excess."

JPMorgan Chase CEO Jamie Dimon. (Elizabeth Frantz/REUTERS) (Elizabeth Frantz / reuters)

Taken together, the savings in an average checking account at JPMorgan "is being spent down" and "we’ve seen that number coming down."

There is still disagreement even within JPMorgan about when the overall figure from all consumers will drop further.

Dimon said he saw three different forecasts, all produced by JPMorgan. One said this savings number would come down by the first quarter of next year, one said the third quarter, and one said the end of next year.

"There are a lot of different ways to measure it."