Interest Rates Condemned: 3 Reasons JPMorgan Commercial Banking Clients Are Optimistic About the US Economy
The Federal Reserve care about ratio impacting global lending rates higher than they have been in 23 years. But that doesn’t hold JP Morgan commercial bank customers from feeling optimistic.
In a survey of more than 100 founders and senior business leaders of companies with revenues of up to $2 billion, more than 90% said they were neutral to optimistic about the United States. economy in the next year.
The survey is not unusual, according to Ginger Chambliss, head of commercial banking research at JPMorgan. Luck in an interview on Monday that the responses reflect a broader trend in the bank’s commercial banking operations. Survey respondents said three main factors were driving their optimism: expected market expansion, new product launches and plans to adopt Artificial intelligence.
“What they see on the ground in their own businesses is giving them optimism about the prospects for their own growth trajectory—and their own revenue and profits,” says Chambliss. “And that’s really the ultimate goal for these business leaders.”
JPMorgan’s commercial banking operations generated $15.5 billion in revenue last year, up 35% year over year, and will reach $3.9 billion in the first quarter of 2024, up 12.5% from the same period in 2023. (JPMorgan’s second-quarter earnings call is scheduled for Friday.)
Despite some business concerns, 28% of respondents said they expect current market expansion to grow in the coming year, 26% expect to launch new products, and 25% are planning to adopt or expand their use of AI.
Chambliss said consumers, businesses and markets are all handling the recent inflation rate, which has risen to 9.1% better than expected, and that a “tightening labor market” has freed them up to think more proactively. In particular, businesses appear willing to try new things as they come to terms with what increasingly looks like a soft landing from record-high inflation, which rebounded to 3.3% after falling to 3.1% in January.
While high interest rates tend to lead to fewer mergers and acquisitions, 34% of leaders surveyed said they expect to engage in M&A in the next 12 months. As interest rates climbed up M&A deals have fallen 32% from their all-time highs over the past two years, according to the Mergers, Acquisitions and Alliances Institute. Founders looking ahead to what increasingly looks like at least one rate cut this year, with more to come, are likely to look to close more deals that have been “pent up” while rates remain high, according to Chambliss.
Reasons to be optimistic
The overall positive outlook is surprising for a number of reasons. First, in a similar JPMorgan poll in January, only 67% of business leaders expressed neutral or optimistic expectations for 2024. This optimism comes in the face of many concerns—and not small ones. Thirty-three percent of leaders said they were concerned about the impact of interest rates on the cost of debt, with the effective Federal Funds Rate now at 5.33%, a level not seen since 5.49% in February 2001. Additionally, 25% of respondents expressed concern about geopolitical conflicts, and 25% cited upcoming elections.
Certainly in the “it all depends” category, 18% of respondents said they plan to hire more employees in the coming year. “There are still indications that midsize business leaders are looking to maintain or grow their workforce,” Chambliss said. “Again, this is a sign of optimism about growth prospects or plans—and we continue to see midsize businesses being resilient.” On Friday, the Bureau of Labor Statistics reported that while nonfarm payrolls increased by 206,000 last month, the unemployment rate remained at 4.1%.
Despite the optimism of respondents, Chambliss said uncertainty remains higher than usual. “We think the best thing for mid-sized businesses, and probably businesses in general, is to take advantage of the opportunity to reduce risk. So whether it’s interest rates, whether it’s commodity prices, reducing risk is something that can really benefit companies in a number of ways—and allow them to focus on the fundamentals of their business.”
The survey results were first released last month at JPMorgan’s ninth annual Founders Forum in New York City. The event featured 115 founders and business leaders from industries including technology, retail, food and beverage, and healthcare, whose companies have annual revenues ranging from $20 million to $2 billion.
