Big Banks Are Warning About An Economic Slowdown For Good Reason

Declines in bond yields, stock prices, and the value of the dollar all point to a declining U.S. … [+] economy.

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Bank executives are sounding the alarm about a weakening economy, and everyone should be taking them seriously. In the last few days, BNP Paribas, Citicorp, Goldman Sachs, HSBC, JPMorgan and Morgan Stanley have all announced either that the probability of a recession is rising or that they are downgrading American stocks from Overweight to Neutral.

It is understandable that the stock market is a big focus, because we can easily see how the escalating trade war and layoffs are affecting stock prices on a second-by-second basis. Stock market indices are leading indicators of where investors presently think the economy is headed. However, banks are not just stock investors; they also invest in bonds, and importantly, have exposure to other business lines such as investment banking, private client services, and asset management, which give them very good insight as to what is happening not just in markets, but also in the real economy. They hire numerous economists, market analysts, statisticians, traders, asset managers, and risk managers who analyze lagging, coincident, as well as leading indicators, to see how their credit and market portfolios, as well as their fee generating businesses are being impacted. These professionals are remunerated highly to use data and facts to make the right calls for the sake of the bank’s profits.

Even though today’s CPI numbers showed a slight decrease in the rate of inflation, the level is still too high. Bank stocks’ investors are telling us that they are worried about banks’ performance; in less than two weeks this month, the Dow Jones U.S. Bank Index has declined over 13%, more than double in comparison to the decline of the overall market, as evidenced by the Dow Jones Industrial Index decline of 5.6% in the same time period.

In addition to keeping an ear attune to what bank executives are saying, all of us should be looking at labor market indicators, consumer sentiment surveys, consumer default probabilities, corporate earnings, and corporate default probabilities and bankruptcy levels.

Labor Market Indicators And Consumer Sentiment

Every type of labor data in the last few weeks is telling us that the job market is getting worse. Last week, I wrote about February job cuts being the highest since the Covd-19 peak, the unemployment rate ticking up, and new job creation slowing down. Unfortunately, just in the last six days, there have been additional signs that the job market will continue to worsen:

• More federal layoffs: NASA, the National Oceanic and Atmospheric Administration and Departments of Defense, Education, and Veterans Affairs
  • President Donald Trump has also mentioned that he might want to cut jobs at the Environmental Protection Agency.
• USDA cancelled $1 billion in local food purchasing from local farms for schools and food banks; this will hurt the farming sector, not to mention those who rely on the food.
• Funding cuts to and hiring freezes at universities such as Columbia, Cornell, Emory, Harvard, MIT, North Carolina State University, Northwestern, Notre Dame, Stanford, University of California-San Diego, University of Maine, University of Massachusetts Chan Medical School, University of Pennsylvania, University of Pittsburgh, University of Vermont, Washington University, and Yale will eventually lead to job cuts.
  • Johns Hopkins University, the country’s largest spender on research and development, and Lakeland Community College in northeastern Ohio announced layoffs on March 12.

And with the aforementioned slew of labor data, it is hard for consumers or business associations to be optimistic. Surveys released this week show Americans’ heightened anxiety.

• The Federal Reserve’s Survey of Consumer Expectations, released March 10, shows that consumers expectations about their households’ financial situations deteriorated significantly.
  • According to the Federal Reserve, “the share of households expecting a worse financial situation one year from now rose to 27.4%, its highest level since November 2023.”
• The National Federation of Independent Business’ Small Business Optimism Index dropped for a second straight month.
  • Respondents are nervous about tariffs and expected to decrease capital expenditures and hiring.

Small business and especially consumer, sentiment, should not be ignored. Consumer spending represents about 70% of gross domestic product.

Rising Consumer Defaults

Bankers are paying close attention to consumer spending, especially since last week’s Federal Reserve Consumer Credit G-19 report shows that Americans’ consumer debt continues to rise. Household debt, excluding mortgages, is now at $5 trillion dollar, about 20% higher than in 2020; the debt is comprised of loans, lines of credit, student and car loans, and credit cards.

With inflation eating at Americans’ purchasing power, wages and salaries not keeping up, and as more Americans lose their jobs, no one should be surprised that Americans will start to pay back debt late, and in worse cases default. The Survey of Consumer Sentiment is already showing that consumers’ probability of missing a minimum payment “in the next three months rose by 1.3 points to 14.6%, the highest since April 2020.” Even before this year’s tariffs and layoffs, consumers defaulted on $59 billion in credit card debt, a rise of over 30% from 2023.

Corporate Earnings Forecasts, Rising Default Probabilities, And Bankruptcies

Ominous signs from large corporations in terms of their earnings forecasts and default probabilities are also of concern.

• Airlines
  • If Americans are losing their jobs or worried about losing them, they may not be in the moody to fly. Corporate executives are also telling us this when they announced earlier this week that difficult times ahead. American Airlines, Delta, Jet Blue, and Southwest have forecast lower earnings for 2025 and United is reducing capacity due to a decrease in passenger demand earnings.
• Retail
  • This sector has already been hard hit for several years due to changes in consumer buying patterns. The tariffs, and threat thereof, and people losing their jobs are pressuring this sector even more.
    • Dick’s Sporting Goods and Kohl’s both announced this week that they are revising their earnings expectations downward. Last week, I wrote about Best Buy, Target, and Walmart all announcing a more dismal outlook.
    • On the Border Mexican Bar and Cantina filed for bankruptcy on March 7.

In early March, Moody’s Ratings announced that rated U.S. companies’ default risk was at 9.2%, which is a post-financial crisis high; at the peak of Covid-19, the default rate was at 7.8%. Also of concern is that U.S. corporate bankruptcies rose to a 14-year high in 2024. Now with tariffs, elevated geopolitical risks, and a weakening labor market, the default probability and bankruptcies are likely to rise.

No matter who is trying to convince the American people with comments such as ‘tariffs will bring in revenues,’ ‘no pain, no gain,’ ‘the stock market does not matter,’ or worst yet, trying to possibly change the definition of what a recession is, the data is not lying. Economic and market signals still point to the fact that a painful recession is coming.

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