Disappointing JPMorgan Chase Q1 Earnings Indicate Slumping Economy, Punishing Inflation
JPMorgan recently posted disappointing first quarter earnings, with net income down 42%. The downturn comes largely due to the war in Ukraine, inflation and supply chain issues, the bank said. CEO Jamie Dimon remarked that while economic growth will persist in the next two quarters, “it’s hard to predict” beyond that.
Net income was $8.3 billion, down 42%, predominantly driven by a net credit reserve build of $902 million compared to a net credit reserve release of $5.2 billion in the prior year.
“The provision for credit losses was $1.5 billion, reflecting a net reserve build of $902 million driven by increasing the probability of downside risks due to high inflation and the war in Ukraine,” the earnings report read, in part.
“We are facing challenges at every turn: a pandemic, unprecedented government actions, a strong recovery after a sharp and deep global recession, a highly polarized U.S. election, mounting inflation, a war in Ukraine and dramatic economic sanctions against Russia. While all this turmoil has serious ramifications on our company, its effect on the world — with the extreme suffering of the Ukrainian people and the potential restructuring of the global order — is far more important,” Dimon wrote in a letter to shareholders.
Peter Cohan, a senior lecturer at Babson College and author of “Goliath Strikes Back,” told GOBankingRates that JPMorgan’s disappointing results reflect the absence — in this first quarter — of the economic stimulus from the government as compared to the previous year.
“Dimon’s comments on the political and economic turmoil we face strike me as reasonable — but I think what would benefit the bank the most is high volatility which springs from uncertainty about inflation, the economy, the war in Ukraine, and the domestic political situation,” Cohan said. “Of all the factors out there, the biggest one is the risk that the Nov. 2022 elections mark the beginning of the end of American democracy should Republicans take over the House and Senate. If that does not happen, I think rational minds can cure the inflationary pressures the economy faces now.”
In terms of the Fed, Dimon said that it should give itself ultimate flexibility from the pattern of raising rates by only 25 basis points and doing so on a regular schedule.
“And while they may announce how they intend to reduce the Fed balance sheet, they should be free to change this plan on a moment’s notice in order to deal with actual events in the economy and the markets. A Fed that reacts strongly to data and events in real time will ultimately create more confidence. In any case, rates will need to go up substantially. The Fed has a hard job to do so let’s all wish them the best,” Dimon said.
Dimon, speaking to analysts on an April 13 earnings call, said that that economic growth will continue in the second and third quarters of this year, driven both by consumers and businesses being “in good shape.”
“After that, it’s hard to predict. You’ve got two other very large countervailing factors, which you guys are all completely aware of,” he said, according to a transcript of the call, naming inflation and the war in Ukraine.
“One is inflation/QE-QT [quantitative easing-quantitative tightening]. You’ve never seen that before,” he said. “Those are storm clouds on the horizon that may disappear, they may not. That’s a fact.”
In terms of the war in Ukraine, Dimon said that while usually wars don’t necessarily affect the global economy in the short run, there are exceptions to that.
“This may very well be one of them,” he said. “Things are unpredictable. Wars are unpredictable. Wars have unpredictable outcomes. You’ve already seen [it] in oil markets. The oil markets are precarious, OK? So, I pointed that out over and over that, you know, people don’t understand that those things can change dramatically for either physical reasons, cyber reasons, or just, you know, supply [and] demand.”