ABA Report: Bank Economists Expect Credit Conditions to Soften in the Second Half of the Year

Bank economists expect credit conditions to soften over the remainder of the year due to the economic headwinds faced by consumers and businesses, 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, bank economists expect business and household credit conditions to improve, while readings below 50 indicate an expected deterioration.

According to the Q3 2023 report, most EAC economists continue to believe that credit quality and availability will weaken over the next six months, and no member of the Committee expects either metric to improve this year. While credit quality and availability have been remarkably resilient since the onset of the pandemic, recent index readings foretell softening credit conditions for both consumers and businesses. In response, EAC members expect that lenders will grow more cautious, particularly given elevated interest rates.

“ABA’s latest Credit Conditions Index anticipates that lenders are preparing for weakening economic growth and increasing financial challenges for consumers and businesses as the year progresses,” said ABA Chief Economist Sayee Srinivasan. “At the same time, bank economists expect inflation to continue to ease, reducing the need for additional Fed rate hikes, and that underlying strength in the labor market will provide a buffer for consumers and businesses.”

In the third quarter:

• The Headline Credit Index improved slightly in Q3 to 7.3, increasing 1.5 points, while remaining near a post-pandemic low. The sub-50 reading indicates consensus among bank economists that credit market conditions will weaken. As a result, banks are expected to exercise caution when extending credit to both businesses and consumers over the remainder of the year.
• The Consumer Credit Index improved 2.6 points to 8.3 in Q3. No EAC members expect consumer credit availability or quality to improve in the next six months and most expect both to worsen. The sub-50 reading indicates that credit conditions for consumers are likely to weaken over the next two quarters.
• The Business Credit Index improved marginally by 0.5 point in Q3 and now stands at 6.3. As a group, EAC members are slightly more pessimistic regarding business credit availability than quality, though both metrics are expected to worsen. The sub-50 reading indicates that credit conditions for businesses are likely to weaken over the next two quarters.

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.