James Gorman defends US economy as markets shudder on recession fears

Top executives at two of Wall Street’s biggest banks have struck an optimistic tone about the trajectory of the US economy, arguing on Monday that consumers were in good financial health despite stark market signals that a recession is looming.

Speaking as US equities slid into bear market territory, Morgan Stanley chief executive James Gorman said investors were forgetting that consumer and corporate balance sheets remain “very strong” following government stimulus during the coronavirus pandemic and years of cheap borrowing.

“I am totally relaxed about it. I don’t think we’re falling into some massive hole over the next few years,” Gorman said at a financial industry conference organised by Morgan Stanley.

Gorman added that markets “aren’t in a very good position”, but said he would rather have “markets off-kilter than the fundamentals driving consumer credit particularly off-kilter”.

Almost 70 per cent of leading academic economists polled by the Financial Times predicted that the US economy will tip into a recession next year, as the Federal Reserve raises interest rates in an effort to contain the highest inflation in about 40 years.

Gorman estimated the chances of an impending recession at about 50 per cent, up from his previous mark of 30 per cent, but he de-emphasised the likelihood that any downturn would be too punishing or long-lasting.

“I think eventually the Fed will get hold of inflation. It’s going to be bumpy. People’s 401(k) plans are going to be down this year, but we’re unlikely at this stage to go into a deeper, long recession,” Gorman said.

His optimism was echoed by Alastair Borthwick, chief financial officer of Bank of America. Borthwick said the bank, the second-largest in the US by assets, was “still seeing very healthy balance sheets and healthy spending”, and that consumer spending in June was up 9 per cent year over year.

Even with higher spending, Borthwick said retail customers were hoarding cash. As an example, he said customers who had account balances of $1,000-$2,500 before the pandemic now had about seven times that amount.

“What we’re seeing right now, credit is in great shape,” he said. “I’d expect it to bump around because we’re at such low levels. And one would think over time, it would trend back towards history, but we don’t see that right now.”