The American Bankers Association’s latest Credit Conditions Index says that bank economists expect credit conditions to soften over the next six months.
This comes as the economy is expected to slow, and the Federal Reserve considers additional steps to rein in inflation.
The latest report has 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. Still, the latest Index readings foretell weakening consumer and business spending along with an elevated risk of a growth pause or mild recession this year. The economists downgraded their forecasts for real economic growth in 2023 from 0.6 percent to no growth for the year. But as a silver lining, the slowdown should help drive inflation closer to the Federal Reserve’s 2 percent target, potentially allowing the Fed to begin to lower interest rates late this year.
“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,” ABA Chief Economist Sayee Srinivasan said. “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.”
The 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. With that said, here are some highlights from the first quarter report.
- The Headline Credit Index improved slightly in Q1 to 12.5, rising 2.5 points. However, it is still near its lowest point since the pandemic started.
- 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 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.
In all three cases, the sub-50 reading indicates that EAC members expect that credit conditions 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,” Srinivasan said. “Bank economists are split on whether a recession will occur this year, underscoring the uncertainty that permeates the current economic climate.”