The Washington PostDemocracy Dies in Darkness

Banks Should Worry About Inflation as Much as Jobs

A job seeker, left, shakes hands with a representative during a Shades of Commerce Career Fair in the Brooklyn borough of New York, U.S., on Saturday, Feb. 17, 2018. The latest initial jobless claims, which correspond to the February employment survey period, fell from the previous week to a five-week low and continue to flirt with multi-decade lows.
A job seeker, left, shakes hands with a representative during a Shades of Commerce Career Fair in the Brooklyn borough of New York, U.S., on Saturday, Feb. 17, 2018. The latest initial jobless claims, which correspond to the February employment survey period, fell from the previous week to a five-week low and continue to flirt with multi-decade lows. (Bloomberg)

Labor markets might not be nearly as tight as they seem from employment data. That’s a headache for banks trying to judge the risks of an uptick in borrowers’ repayment problems.

Traditionally, what matters most for banks lending to consumers is unemployment because it can lead to disastrous drops in income for debtors. That’s why it’s one of the first inputs in central bank stress tests: It has big knock-on effects for everything from house prices to commercial property demand. Initial jobless claims in the US fell again in last week’s data, and Bloomberg Economics forecasts strong growth in US payrolls for August, continuing a run that has lasted more than 18 months and returning employment to pre-pandemic levels. This should be great news for lenders.

However, there are signs that power is shifting in labor markets back toward employers: That spells a tougher time switching jobs or bargaining for higher pay while inflation eats away at disposable incomes. A growing share of even the middle classes are running out of cash after paying monthly expenses. 

This could spell trouble for lenders even without a rise in unemployment. Many people’s livelihoods could already be more finely balanced than the strong headline employment data suggest in the US — and perhaps even more so in the UK and parts of Europe, where domestic energy costs are skyrocketing.

Banks in the US and Europe haven’t seen signs of any problems for borrowers in the first six months of this year, but they still faced a mystery. Lenders like Citigroup Inc., JPMorgan Chase & Co., and Bank of America Corp. all reported strong spending on leisure in the second quarter but against a backdrop of miserable consumer sentiment. Results last month showed many customers are spending freely on entertainment and eating out with the backing of high savings and plenty of borrowing capacity. Alastair Borthwick, chief financial officer at Bank of America, was among those to point to a rise in unemployment as the single most important factor that would hit incomes and harm borrowers. Strong demand for labor helped keep credit risks low so far.

The evidence for the shifting influence in labor markets comes from a string of recent surveys that appear to show a reversal in many pandemic-era trends. For example, in the US nearly 60% of respondents to a Harris poll conducted for Bloomberg News this week said employers now have more leverage in the jobs market, up from 53% in January.

Part of the explanation might be the job cuts hitting formerly high-growth technology businesses or those that benefited directly from pandemic restrictions: Think Apple Inc., Robinhood Markets Inc. and Peloton Interactive Inc. There’s been an uptick in “boomerang employees” as a result – people returning to their more traditional 9-to-5s after spells working in startups or social media and so on. 

This might sound niche and contained, but there are broader signs, too. For one, half of US companies have hiring freezes in place, according to a PwC survey last week. Also, employer power can be seen in cuts to benefits such as parental leave. The share of companies offering more than the legal minimum for maternity or paternity leave fell to 35% this year from 53% in 2020, according to the Wall Street Journal.

Banks need to keep a close eye on all of this because of the effect employer power has on incomes at a time when the cost of monthly basics and debt repayments are growing. 

However, inflation alone could in effect already be starting to rob borrowers of income without them losing their jobs. Retailers are already complaining that wealthier middle class people are becoming more cost-conscious and buying less in department stores like Kohl’s Corp. That tracks with Wells Fargo & Co. saying at its second-quarter results that spending on clothes and home improvement was falling sharply. Having good data on credit-card use helps lenders see what customers are spending their money on and when they start borrowing to pay for necessities.

Consumers can still cut back on going out and having a good time, but the more that basic monthly costs of food, fuel and electricity eat up incomes, the sooner consumers will be leaning on credit cards to see them through the month – and the sooner repayment problems will start to rear up as well, whether unemployment rises or not.

More From Bloomberg Opinion:

• Inflation Is Even Pinching the Middle Class Now: Andrea Felsted

• Jackson Hole Should Be a Mea Culpa for Central Bankers: Marcus Ashworth

• Wells Fargo and Citi Customers Are Still Spending: Paul J. Davies

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

More stories like this are available on bloomberg.com/opinion

©2022 Bloomberg L.P.

Loading...