A report from the American Bankers Association predicts that credit conditions are expected to soften over the next six months.
According to the ABA’s Credit Conditions Index, a weakening labor market and persistent inflation will continue to stay below its neutral threshold of 50 for the third consecutive quarter. The Credit Conditions Index derives a quarterly outlook for credit markers. Readings above 50 indicate that bank economists expect business and household credit conditions to improve, while those below 50 indicate expected deterioration. After entering expansionary territory at the end of 2024, the Index registered 34.4 in the third quarter of this year.
“While economic growth is expected to remain positive, a softening labor market and an inflation rate above the Fed’s target will weigh on credit conditions,” ABA Chief Economist Sayee Srinivasan said. “‘On the positive side, the recent rate cut and anticipated additional cuts over the next few quarters should mitigate some of these headwinds. However, slower economic growth and higher inflation could disproportionately impact credit quality for smaller businesses and lower-income consumers.”
The report said the Headline Credit Index rose 2.3 points to 34.4, driven by reduced expectations for a deterioration in credit availability, while the Consumer Credit Index rose 8.9 points to 37.5, meaning most bank economic expect consumer credit quality to deteriorate over the next six months. The Business Credit Index fell 4.4 points to 31.3 due to deteriorating expectations for business credit availability.
“While a lower share of respondents expected credit quality to weaken compared to the previous quarter, respondents were more negative about firms maintaining access to credit. All respondents expected business credit availability to either deteriorate or hold steady over the next six months,” the report said.