Two-Headed Monster of Inflation and Recession Emerges

In a survey of economists by the Wall Street Journal, the likelihood of a recession within the next 12 months is now 28% and growing. Estimates in January were only 18%. Also, full-year 2022 growth rates have been revised down to an average of 2.6%. This news is in addition to four-decades highs of inflation.

Analysis of the Federal Reserve has led to a consensus that countering high inflation is a greater priority for the Fed than the possibility of recession. Many believe the Fed will attempt to aggressively cool the economy through interest rate increases enough to bring down inflation, but not so much that it creates a pull-back in spending resulting in higher unemployment. Such conditions could lead to dreaded "stagflation", which is characterized by slow growth, rising joblessness and increasing prices.

Banks Begin to Prepare for the Worst

Although a number of banks cited a strong and growing economy, robust double-digit growth in credit card spending, and low delinquencies, some institutions, led by JPMorgan Chase, said it was setting aside funds in case the economy slips into a recession. The funds would protect against recessionary results such as increased loan defaults.

Profits across banking are expected to decrease significantly — some analysis says by a third or more in the first quarter. JPMorgan, the country’s largest bank, reported lower home loan originations by 37% due to increased interest rates. They also said auto loan originations were down 25%, primarily due to low inventory of available cars and supply chain issues.

IPOs Sputter

Complicating matters is the slowed activity in corporate and investment banking, particularly the slowing number of IPOs.Total investment-banking fees for JPMorgan fell 31%. Equity underwriting sank 76% to its worst quarter in six years.