US banks signal better economy

With three sets of earnings reports in the bag from the big US banks, it seems that the improvement in the US economy is being reflected in results.

Last Friday saw JP Morgan and Wells Fargo kick off the season, with both banks reporting figures ahead of expectations. JP Morgan saw revenues up 10%, while Wells Fargo enjoyed a 20% rise in profits, taking them to $5.27 billion.

Citigroup, once the global banking titan but now rather cut down from its former glory, reported a whopping 41% rise in second-quarter profits, and, in common with its peers, saw increased activity in the mortgage department. Loan volumes are rising again, as more Americans look to move house.

Economic recovery

Banks are a crucial indicator for any national economy, since they see the life-blood of capitalism – loans – moving through their books. US banks have enjoyed an excellent performance over the past 12 months, with Citigroup and Morgan Stanley enjoying a near 100% rise.

US banks' earnings July 2012-July 2013

These improvements in bank earnings are a clear signal that we are seeing a broad-based economic recovery in the US. While this does boost the likelihood of tapering from the Federal Reserve, the American economy will drag everyone else with it.

Crucially, it will also boost confidence for the rest of earnings season, with expectations for this particular round of updates having been rather low. From the above graph we can see that Wells Fargo has lagged behind its peers quite considerably, but given the more domestic focus of the bank it could outperform some of its more globally-minded competitors.

Housing and employment

In addition, there is still a lot of ground to be made up in the housing sector. US housing has taken a long time to show real signs of recovery, but now it is playing catch-up the gains could be quite impressive.

With job growth on the rise too, the signs for the US economy are looking a lot better.

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