BofA’s Moynihan on Economic Outlook, Office Downsizing & AI

Bankers have been see-sawing for a year over whether the Federal Reserve’s efforts to tame inflation could trigger a recession.

As recently as July, Bank of America Chairman and Chief Executive Brian Moynihan told CNBC that his research teams expected a “slight recession” in the first half of 2024. Before that, BofA’s predictions were even more bearish.

But at a Wednesday luncheon hosted by the Economic Club of New York, Moynihan said that consumers have slowed their spending just enough to ease the U.S. economy towards a so-called “soft landing,” though their borrowing rates are likely to remain high through next year.

“We won’t have a recession,” Moynihan said.

In the nearly hour-long conversation with CNBC’s Becky Quick, the CEO of the $3.1 trillion-asset bank touched on many topics, including the growing use of artificial intelligence in the banking industry and a regulatory proposal calling for higher capital levels at the country’s largest banks.

He also discussed the commercial real estate market, saying that — despite the popular narrative — the trend of companies downsizing their office space predates the pandemic.

Consumers Ease the U.S. Economy Towards ‘Soft Landing’

Moynihan shared spending data from BofA’s 68 million customers to bolster his argument that the Fed’s efforts to slow economic activity and curb inflation are starting to pay off.

“It’s a slow grind out, but they’ve won the near-term battle,” he said of the Fed.

BofA has insight into $4 trillion worth of consumer spending each year, which works out to more than $300 billion a month, Moynihan said. “So it’s not a small sample.”

Spending in 2022 increased 9.5% from the previous year, the data shows. It has decelerated in 2023, to a growth rate of about 4.8% year to date. And it slowed a little more as of September, with spending for the month about 4.5% higher than it was in the same month last year.

This puts spending growth at a level similar to 2016-2018, when there was a “low inflation” economy, Moynihan said. “That’s the most interesting thing — it’s really changed from the beginning of the year to the end of the year.”

He also said that in general BofA customers have “significantly” more money in their checking and savings accounts than they did in 2019 and early 2020, a trend that is especially pronounced for lower-income groups.

Consumers Still Have a Savings Cushion

Bank of America customers — especially those with lower incomes — have “significantly” more money in their checking and savings accounts than they did pre-Covid, according to Moynihan. Those who tend to have inconsistent cash balances are doing particularly well, averaging $21,000 in savings, up from $7,000 before the pandemic, though, in aggregate, their balances are declining.

In July, BofA reported its average deposit balances of $1.9 trillion were down 7% from the year earlier. Meanwhile, deposits across the industry were down 8% year over year.

But Moynihan said that the deposit downturn has been driven by wealthier consumers who moved money to investment accounts to increase their yields.

The segment of consumers who tend to have more inconsistent cash balances are saving more, Moynihan said, with the “same customers” who averaged $7,000 in deposits before the pandemic now “sitting on” $21,000. He added a caveat, saying that these cash reserves are “coming down” on the aggregate, with some “lower income consumers” starting to show negative cash flow. But Moynihan said those examples are “at the edge” of the larger customer population.

BofA can see from customers’ paychecks that wages are still growing overall, but at a much slower rate in recent months. The slowdown is especially apparent for households earning more than $125,000, Moynihan said.

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Commercial Customers Are Doing Well

By and large, BofA’s commercial customers are in good shape, with strong credit quality and a lot of excess capacity in their credit lines, Moynihan said. But he cautioned that the slowdown in consumer spending could add stress.

Businesses “aren’t using the credit available to them because the opportunity is not as high,” he said, warning that they will have to “manage expenses carefully to preserve margin” and “manage labor more tightly.”

Job openings are already starting to decline and fewer people are quitting, according to July’s Job Openings and Labor Turnover Survey from the U.S. Department of Labor. This indicates the Fed has succeeded in cooling off the labor market.

BofA’s business customers “aren’t using the credit available to them because the opportunity is not as high.”

— Brian Moynihan, Bank of America

But Moynihan stressed that the roughly $4 trillion in annual spending activity by BofA customers suggests more Fed action is needed. “The Fed has to slow that down because, if that keeps going, they can’t slow the economy down,” he said. “They’re fighting this unbelievable force — which is the U.S. consumer.”

At the same time, “they’ve got to be careful they don’t go too far,” he added.

BofA economists predict that the Fed will raise interest rates once more in November, followed by three rate cuts in 2024 and four in 2025. Their forecast is that the U.S. will not enter a recession, and that quarterly GDP growth will rebound to above 1% by the end of 2024, after a few slow quarters.

Inflation Worries: Gas Prices, Rent and Geopolitical Risk

Inflation has cut into consumer savings, with gas prices starting to creep up again in the past two months. BofA customers spent more on gas in September and August than in previous months, accounting for roughly 7% of debit and credit card spending, according to the bank’s data.

But Moynihan said he is more concerned about the 40% of Americans who are renting. Housing shortages have driven up rental prices in many U.S. cities, with the median asking price for rents nationwide approaching $2,052 in August, according to the firm Redfin. That’s a 0.7% uptick from July and just $3 short of topping the record high posted in August 2022.

“That’s the one I think you have to worry about,” Moynihan said.

A Trend Moynihan Is Watching:

Two-fifths of Americans are renting at a time when the median rent nationwide exceeds $2,000 a month. This concerns Moynihan even more than a recent uptick in gas prices.

The Fed has limited influence on supply-side issues, though. Moynihan noted that the Fed can’t “permit a housing development” and that there are “1,000 things out there that could lead to higher inflation.”

He cited “geopolitical risks everywhere” as a major concern, saying he agrees with JPMorgan Chase Chairman and CEO Jamie Dimon about the potential for world events to wreak havoc on the economy. But “those are things you can’t control,” Moynihan added.

Earlier in the week, Dimon told the India Times that ripple effects from souring U.S.-China relations and the ongoing war in Ukraine could result in interest rates going as high as 7%. “We urge our clients to be prepared for that kind of stress,” Dimon said. “Warren Buffet says you find out who is swimming naked when the tide goes out.”

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Moynihan’s Take on the Commercial Real Estate Market

Moynihan used BofA as an example when discussing commercial real estate trends, saying the company shrunk its total real estate from 130 million square feet in 2010 to about 65 million or 70 million square feet today.

“We never got above 80% occupancy of the space, so we still have room to go,” he said.

His point was that the pandemic simply accelerated the office downsizing trend that was already well underway. But it was an aha moment of sorts, helping many business leaders see even greater potential than before for improving efficiency.

“Believe me, I’m not alone in this,” he said. “All the CEOs are saying the same thing.”

At-home work options have resulted in less foot traffic in downtowns across the country. Many workers can skip coming into the office at least one day a week, which translates into fewer potential customers for smaller merchants in those downtown areas on a weekly basis, he said. “But again, uses will come out of this.”

One phenomenon already playing out is that “people my age are moving back into the city because they don’t want to commute,” said Moynihan, who will turn 64 in October. “They bring vibrancy to the city because they tend to have more money to spend at that stage in life.”

Still, there is “a big adjustment” happening in the office and retail segments, which will make things tough for a while, he said. “This just takes a long time to walk through the system.”

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BofA Expanding Its Use of Artificial Intelligence

Moynihan touched only briefly on technology, but he spoke enthusiastically about the efficiency gains that artificial intelligence enables.

Erica is a virtual assistant that helps BofA’s retail customers with financial advice, product recommendations and transactions. Moynihan said Erica handled 200 million customer interactions in the second quarter. Without Erica, those interactions might have prompted a phone call, email or text.

“We believe in this fully,” Moynihan said of AI.

BofA announced in mid-September that it had upgraded its chatbot for business customers — called CashPro Chat — by incorporating the same AI and machine learning technology that powers Erica. CashPro Chat can now help business customers with viewing transactions and finding information, among other functions. More complex requests still get routed to humans.

During the discussion about AI, Moynihan referenced comments from Gary Gensler, the chairman of the U.S. Securities and Exchange Commission, who warned in August that artificial intelligence could be a risk to the financial system.

“We have learned, with models and things, they can go awry,” Moynihan said, acknowledging the need for some human oversight with functions like credit underwriting.

Providing checks and balances on the reliability of the data powering AI is especially important, he added.

“You have to make sure that data is really right, upon which you’re exercising a decision,” he said. “And that’s not a small task right there.”

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Higher Capital Requirements for Big Banks Would Crimp Lending

Moynihan criticized a regulatory proposal to impose stricter capital requirements on U.S. banks with more than $100 billion of assets.

He said the proposal — which could force the big banks to increase capital reserves by as much as 16% — would reduce their lending capacity. In addition, loans from banks like BofA would become more expensive, and by extension, U.S. businesses that rely on those loans would become less competitive in the global market.

“At the end of the day, this is a trade negotiation question as much as it is a banking regulation question,” Moynihan said.

He added that the so-called “Basel III endgame” — which includes the higher capital requirements — would have done little to avert the spring banking crisis. He blamed the failure of several large regional banks on poorly diversified business models rather than wider instability across the industry. His position echoes that of banking trade organizations and other CEOs, including Dimon.

Moreover, the crisis demonstrated that the banking industry is flush with capital and liquidity, Moynihan said. The country’s largest banks were “a source of strength,” providing a deposit lifeline to prop up one of the struggling regionals and submitting competitive bids on the banks that failed.

“We actually were able to help with the problem,” he said.

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Citigroup’s Jane Fraser shared her behind-the-scenes account of that deposit lifeline when she spoke at an Economic Club luncheon in March.