ABA Report: Bank Economists Expect Credit Conditions to Weaken over Next Six Months as Inflation Moderates

Bank economists expect credit conditions to soften over the next six months as the economy slows and the Federal Reserve considers additional steps to rein in inflation, according to the American Bankers Association’s latest Credit Conditions Index released today. 

The latest summary of ABA’s Credit Conditions Index examines a suite of indices derived from the quarterly outlook for credit markets produced by ABA’s Economic Advisory Committee (EAC). The EAC includes chief economists from North America’s largest banks. Readings above 50 indicate that, on net, the bank economists expect business and household credit conditions to improve, while readings below 50 indicate an expected deterioration.

The latest report finds slightly less pessimistic near-term expectations for business and consumer credit quality and availability in the first quarter of 2023 compared to last year’s fourth quarter, as EAC members continue to expect credit conditions to deteriorate over the next six months. While credit market conditions have been remarkably resilient since the onset of the pandemic, the latest Index readings foretell weakening consumer and business spending along with elevated risk of a growth pause or mild recession this year. Expectations of reduced demand led EAC members to downgrade their forecasts for real economic growth in 2023 from 0.6% to no growth (Q4/Q4). However, a slowdown should help drive inflation closer to the Federal Reserve’s 2% target, potentially allowing the Fed to begin to lower interest rates late this year, according to the EAC.

“ABA’s latest Credit Conditions Index provides further evidence that lenders are adjusting to economic conditions and preparing for increased financial stress among consumers and businesses this year,” said ABA Chief Economist Sayee Srinivasan. “At the same time, recent news on GDP growth, consumer spending and inflation is encouraging and job growth remains robust, suggesting that a soft landing is still possible.”

In the first quarter:

• The Headline Credit Index improved slightly in Q1 to 12.5, increasing 2.5 points but remaining near its lowest point since the onset of the pandemic. The sub-50 reading indicates that bank economists expect credit market conditions to deteriorate over the next six months as the Federal Reserve continues to raise interest rates. 
• The Consumer Credit Index improved 3.6 points to 13.6 in Q1. EAC members expect credit quality to deteriorate more than credit availability, though the majority expect both to worsen. The sub-50 reading indicates that EAC members expect consumer credit conditions to weaken over the next six months.
• The Business Credit Index improved 1.4 points to 11.4 in Q1, with the majority of EAC members expecting both business credit availability and quality to deteriorate over the next two quarters, and no member expecting either metric to strengthen. The sub-50 reading indicates that EAC members expect that overall credit conditions for businesses will continue to weaken over the next two quarters.

“For now, most measures of consumer financial stress remain muted, and many companies continue to hire even as expectations for business conditions are weakening,” said Srinivasan. “Bank economists are split on whether a recession will occur this year, underscoring the uncertainty that permeates the current economic climate.”

Read the full report with detailed charts and a discussion of the broader economic context.

About the Credit Conditions Index 

The ABA Credit Conditions Index is a suite of proprietary diffusion indices derived by the American Bankers Association from surveys of bank chief economists from major North American banking institutions. Since 2002, the bank economists have forecasted credit quality and availability for both businesses and consumers, indicating whether they expect conditions to improve, hold steady, or deteriorate over the ensuing six months. Readings above (below) 50 indicate that, on net, these expert business analysts expect credit market conditions to improve (deteriorate). Input from the bank economists is equally weighted in the indices. This data will remain anonymous, but historical index values are available upon request.

Answers to Frequently Asked Questions about the ABA Credit Conditions Index can be found in an Appendix attached to the outlook. This report and all previous reports can be found at https://www.aba.com/news-research/research-analysis/aba-credit-conditions-index.