Bank earnings reports reflect major uncertainty in U.S.
The biggest American banks are girding themselves against depressed economic activity for the remainder of the year.
The COVID-19 pandemic is far from over, especially in the United States. A few months ago, I wrote about three possible scenarios to consider as people were assessing and planning for the upcoming months. The first scenario, the optimistic hope of a V-shaped rebound of economic activity, is now off the table. As we see people re-confined to their households from Australia to Japan to Catalonia, one thing is clear: this virus, this pandemic, is the big one. It continues to spread all around the globe, with ever-changing geographic hot spots, overwhelming governments and people while causing massive disruptions to daily life.
Now, six months on from the discovery of the virus in Wuhan, China, Europe is slowly staggering back to life. While there is a long way to go yet, some figures from the Old Continent are encouraging. Retail is rebounding. Industrial production, while still far lower than the previous year, has begun to tick back up. People are planning their holidays for August. The numbers, and daily life, paint a picture of a slow but steady resumption of normal life.
It is, however, a very different story across the Atlantic. The United States has failed to meaningfully suppress the virus. Its rampant spread in various parts of the country has led governors of many states to reimpose business closings, mandate their citizens wear masks, and urge people to stay home. While the early outbreak in the U.S. was limited to certain hot spot regions like the northeast, and New York City in particular, now cases are growing rapidly in western and southern states. The country has the most confirmed COVID-19 cases and deaths in the world.
The surge of the virus throughout the country and the accompanying restrictive measures were clearly reflected in the earnings reports of top financial institutions last week. The three largest American banks – JP Morgan Chase, Citigroup, and Wells Fargo – disclosed their Q2 reports and it made for grim reading in terms of future expectations. Across the board, their announcements pointed to expectations of a protracted period of severely muted and uneven economic activity. Each bank announced huge sums set aside for bad loans. In total, the three lenders are allocating more than $28bn for loan losses.
The assumption of significant loan losses is yet another indicator of the serious economic situation in the United States. Beyond the expected losses, banks are planning major job cuts. Later this year, Wells Fargo will begin a reduction that could ultimately end up in the tens of thousands of jobs. The planned cuts follow on from changed customer and working habits brought about by the pandemic: more elements of daily life can be done digitally and remotely than previously thought. The CEO of Wells Fargo, Charles Scharf, said, “We also have the opportunity to apply lessons we have learned since the onset of the pandemic to drive efficiency across the company. Over the medium term, we have the opportunity to materially reduce our expense, including increasing digital adoption for retail and commercial clients.”
Next up in America, all eyes will turn to Congress in the final weeks of July to see what the next stimulus package contains. A critical element of the CARES Act, passed in March, was expanded unemployment benefits, to the tune of $600 a week, for those who lost their job. That money has been a lifeline for the millions of people who are no longer employed due to this pandemic. According to Morgan Stanley, 33 million Americans are now claiming some form of unemployment benefits. Those expanded benefits are set to expire at the end of the month, with the last unemployment check being sent to recipients on July 25th.
With the virus nowhere close to being contained, normal life a distant memory, and businesses forced anew to close their doors, government support will be necessary to prop up the American economy. If Congress is not able to deliver meaningful reinforcements, many Americans will find themselves in perilous financial situations. While markets have rebounded from their precipitous mid-March drops, they appear to be increasingly disconnected from the reality of the economy. Each day brings news of fresh layoffs or bankruptcy at iconic American companies. The initial economic shock of the coronavirus forced businesses to temporarily close and quickly find new ways of working. Now, four months on, the shock has turned into a recession and businesses are making closures and layoffs permanent.
With no coronavirus vaccine right around the corner, 2020 promises to continue being a turbulent time for everyone in America. Governments, businesses, financial institutions, and everyday citizens are in for a rocky second half of the year. Schools and universities are unlikely to have in-class instruction, no fans will be allowed at sporting events (if they even take place), and a contentious presidential election is in November. All eyes will be on the world’s largest, but most uncertain, economy.