In a notable shift from recent trends, major U.S. financial institutions report signs of a cooling economy, particularly in consumer spending patterns. This development comes as the Federal Reserve continues its aggressive campaign to tame inflation through interest rate hikes.

Bank of America, a key barometer of consumer financial health, has observed a significant deceleration in its card volume growth. CEO Brian Moynihan revealed that while retail payments experienced a robust 11% increase this year, reaching an impressive $4 trillion, this figure masks a recent slowdown. The contrast is striking: November’s spending growth stood at a modest 5%, a marked departure from the double-digit expansion in the wake of the pandemic.

For the past two years, American consumers have been the driving force behind economic growth, their purchasing power bolstered by pandemic-era stimulus checks, wage gains, and a favorable employment landscape. However, this pillar of financial support appears to be weakening, a development that could have profound implications for corporate profits as businesses navigate the challenging terrain of 2023.

Wells Fargo CEO Charlie Scharf echoed these sentiments, stating unequivocally, “There is a slowdown happening, and there’s no question about it.” Scharf’s outlook for the coming year is tinged with caution, as he anticipates “a fairly weak economy throughout the year.” However, he hoped any downturn would be “somewhat mild relative to what it could be.”

Both banking leaders have aligned in their expectations of a recession in 2023. This forecast is underpinned by observable shifts in consumer behavior, with Scharf noting, “We have seen certainly more stress on the lower-end consumer than on the upper end.” This disparity in financial resilience across income brackets paints a nuanced picture of the current economic landscape.

The slowdown is manifesting in changing consumer priorities. After a prolonged period of pandemic-driven goods purchases and discretionary spending, there’s a noticeable pivot towards services. Scharf highlighted this shift, saying, “You’re seeing significant shifts to things like travel, restaurants, entertainment, and some of the things people want to do.” This reallocation of consumer dollars could reshape various sectors of the economy in the months ahead.

It’s worth noting that this cooling of consumer spending aligns with the Federal Reserve’s objectives. As the central bank grapples with persistent inflation, the dampening effect on consumer activity is a desired outcome of its monetary tightening policy. Moynihan pointed out that many market forecasters anticipate the Fed’s benchmark rate to reach approximately 5% next year. However, some analysts believe even higher rates may be necessary to bring inflation under control.

As the effects of these rate hikes permeate the economy, Moynihan observed, “You’re starting to see that slowdown take hold.” The critical question facing policymakers and business leaders is how to manage this deceleration without triggering more severe economic repercussions. “The real question will be how soon they have to stabilize that to avoid more damage,” Moynihan remarked, encapsulating the delicate balance the Fed must strike.

Bank of America’s and Wells Fargo’s experiences provide a window into the broader economic trends at play. While some companies in their client bases continue to perform well, others are grappling with challenges. This divergence underscores the uneven nature of the current economic environment and the potential for sector-specific impacts as consumer behavior evolves.

As we look towards 2023, the trajectory of consumer spending will be crucial in shaping the economic landscape. The shift from goods to services, the disparate experiences across income levels, and the overall cooling of expenditure all point to a period of adjustment ahead. How businesses and policymakers navigate these changes will likely determine the depth and duration of any economic downturn.

With significant bank CEOs sounding cautionary notes and consumer spending patterns in flux, all eyes will be on the interplay between Fed policy, inflation, and consumer behavior in the coming months. The ability to adapt to these evolving economic conditions may well separate the resilient from the vulnerable in what promises to be a challenging year ahead.

As the economic winds shift, the insights provided by these banking leaders offer a valuable compass for navigating the uncertain waters of 2023. The coming months will reveal whether their predictions of a mild recession come to fruition and how well the broader economy can weather the storm of reduced consumer spending and tightening monetary policy.