Investors in the week ahead will receive an update on durable goods orders, amid recent improvements in consumer sentiment, as well as signals from the financial sector about increased household borrowing.

Although big U.S. bank earnings results Tuesday were mixed, there was a common thread running through the reports that appeared to reflect consumers’ collective appetite for credit.

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J.P. Morgan Chase (NYSE: JPM), for example, attributed increases in its Consumer & Community Banking (CCB) division in large part to an uptick in home lending, credit cards, and auto loans.

Overall, the bank’s results beat most analysts’ expectations, with earnings of US$2.68 per share, up from US$2.34 in the same year-ago quarter, on net income of US$9.1bn, a rise of 8%. Also, revenues rose 8% year-on-year to around US$31bn.

J.P. Morgan further highlighted that credit card loans rose 8%, while credit card sales volume surged 10%, and merchant processing volume went up 11%.

Jamie Dimon, J.P. Morgan’s chair and CEO, said that while the pace of U.S. economic growth has “slowed slightly,” the consumer remains “healthy with growth in wages and spending, combined with strong balance sheets and low unemployment levels.”

In its CCB business, J.P. Morgan’s home lending net revenue spiked 12% to US$1.5bn, mainly driven by higher net production revenue, while card, merchant services, and auto net revenue rose 9% to US$6.1bn, due primarily to higher card net interest income on loan growth and margin expansion, as well as higher auto lease volumes.

Other banks also unveiled upbeat revenues from their consumer operations.

At Wells Fargo (NYSE: WFC), consumer loans increased US$5bn over the prior quarter, partly reflecting a US$1.1bn rise in auto loans – underscored by a 9% climb in originations from Q2 to US$6.9bn – as well as aUS$809m rise in credit card borrowing.

Also, sales at Citigroup’s (NYSE: C) North American Global Consumer Banking division increased 4% to US$5.4bn in the third quarter of 2019, including an 11% rise in Citi-Branded Card revenues to US$2.3bn, which the bank attributed to continued growth in interest-earning balances, while Citi Retail Services revenues shot up 1%to US$1.7bn, driven by organic loan growth.

Against this backdrop, most big commercial banks’ stocks were up around 2% to 4% intraday Tuesday, as investors digested the details of their earnings.

Debt-fueled Durable Goods?

The rise in consumer borrowing may portend well for September’s durable goods figures, after new orders in August ticked up 0.2% to U$250.7bn, the third straight month of increases, following a 2% jolt in July. Ex-transportation, new orders were up 0.5%.

Thursday, October 24

• Durable Goods (Sept)

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However, the brighter picture for consumer spending may come at the cost of swelling, and perhaps unmanageable debt burdens, amid the Federal Reserve’s policy of maintaining an ultra-low U.S. interest rates landscape.

According to the New York Fed’s Center for Microeconomic Data (CMD), aggregate household debt balances had increased by US$192bn in Q2 2019, a rise of 1.4%, to almost US$13.9tn. The balances have been “steadily rising” for five years and are now US$1.2tn higher, in nominal terms, than the previous peak of US$12.7tn set in Q3 2008.

Overall household debt is now 24.3% above its Q2 2013 trough.

Further evidence of consumers amassing higher amounts of debt may be seen in the rise of new extensions of credit, which the CMD noted were “strong” for Q2.

Auto loan originations, staged a “small increase” year-on-year to US$156bn, mortgage originations had a “marked increase” from the prior quarter to US$474bn; and the aggregate credit card limit “crept up” for the 26th consecutive quarter, with a 1.1% increase from Q1 2019.

Also, outstanding student loan debt, which fell US$8bn from the prior quarter to US$1.48tn in Q2, remains at an astronomical level. The CMD observed that 10.8% of aggregate student debt was 90+ days delinquent or in default in Q2 2019, with the transition rate into 90+ delinquency at nearly 10%, “a deterioration” of 0.5% from the previous quarter.

Indications from other companies such as Visa (NYSE: V), which has recently extended its partnership with J.P. Morgan Chase through the end of 2029, seem to agree with the trend of rising consumer credit.

In late July, Visa CFO Vasant Prabhu, for instance, pointed out that that volume growth of U.S. payments at the company registered 9%, up 1 point from its prior fiscal Q2 2019 quarter, driven in part by “higher consumer credit growth”.

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Shares of Visa and rival Mastercard (NYSE: MA) have risen around 35% and 47% year-to-date in 2019, outpacing returns of about 19.5% on the Financial Select Sector SPDR Fund (NYSEARCA: XLF), which has among its holdings titans such as Berkshire Hathaway (NYSE: BRK-B), J.P. Morgan Chase and Citigroup.

Managing the Burden

To handle the debt load, U.S. households generally appear to be shoring up their credit profiles.

Household debt as a percentage of gross domestic product (GDP) has fallen by around 0.7% year-on-year to roughly 74.2% in Q2 2019, and the ratio of household debt to disposable income has shrunk about 2.5% to 96.6% over the same period.

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Meanwhile, growth in workers’ wages do not appear to be as healthy as J.P. Morgan’s CEO had touted in the company’s Q3 2019 earnings release.

In September, average hourly earnings (AHE) for all employees on private nonfarm payrolls, at US$28.09, were little changed (-1 cent), after rising by 11 cents in August. Over the past 12 months, AHE have increased by 2.9%. In September, AHE of private-sector production and nonsupervisory employees rose by 4 cents to US$23.65.

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Economists at Jefferies recently noted that no change to average hourly earnings (AHE) on the month, and a “substantial deceleration” in the year-on-year measure to 2.9% from 3.2% — the slowest year-on-year since July 2018 — “are troubling.”They added that the AHE data did not fit with any other supporting data or the trends coming into September, “but it bears watching either way and the weakness can’t be dismissed.” 

On a more upbeat note, the unemployment rate hit a 50-year low of 3.5%.

Save Spending or Spend Savings?

Overall, personal spending in the U.S. has been trending downwards, likely as households rein-in their expenses to combat their rising debt burdens, amid stagnating wages.

Investors will likely be watching the upcoming report on durable orders for a gauge on the sustainability of household debt, as well as other economic releases in the week, including on existing and new home sales for September, a flash reading of IHS Markit’s Manufacturing PMI for October, as well as final figures from the University of Michigan’s Surveys of Consumer Sentiment.

More signals on consumer spending appetite may be gleaned from the massive wave of companies announcing earnings in the week ahead, including Harley-Davidson (NYSE: HOG), Hasbro (NASDAQ: HAS), McDonald’s Corp (NYSE: MCD), Procter & Gamble (NYSE: PG), Texas Instruments (NASDAQ: TXN), Whirlpool (NYSE: WHR), Amazon.com (NASDAQ: AMZN), eBay (NASDAQ: EBAY), Expedia (NASDAQ: EXPE) and Microsoft (NASDAQ: MSFT), among several others.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.