Big banks raise a giant red flag for the US economy

Some of the country’s largest banks are expected to see a 15% decline in profits in the fourth quarter compared to the year before, signaling a possible recession, according to The Wall Street Journal’s analysis of data from FactSet, an independent financial data company.

JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley will report their fourth quarter results in the coming days, which are expected to demonstrate a total of about $28 billion in profits, 15% lower than the fourth quarter a year prior, according to the WSJ. Banks have set money aside over the past year in anticipation of a slowing economy, which can cut banks’ profits.

Bank profits can serve as a bellwether for the broader economy; the factors contributing to declining bank profits, such as high interest rates, can also contribute to a possible recession by slowing housing and labor markets.

Bank revenues will likely rise from the year prior due to rising interest rates, but rate hikes drive up banks’ interest costs and cut into profits, according to the WSJ. Rising interest rates have also driven up mortgage costs and cut into the revenue banks typically earn through home loans, all while cooling off the housing market.

Banks are also taking massive unrealized losses in the volatile securities market, according to the WSJ.

This is the latest of a series of red flags indicating a possible economic downturn may be around the corner. U.S. government pension funds have the lowest cash holdings since the 2008 financial crisis, and corporate pensions’ cash holdings are barely above the 13-year low they hit in 2021; pension funds could be forced to sell off assets at low prices to continue payments, resulting in a massive loss in value.

While American consumers are still spending above pre-pandemic levels and credit and debit card spending is still rising, the coming year will likely present new challenges due to volatility in financial markets, Bank of America warned, according to the WSJ.

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