ABA: Credit conditions will weaken in next 6 months

Bank economists expect currently solid business and consumer credit markets to weaken over the next six months as the Fed raises interest rates to combat inflation and supply chain disruptions continue, according to the American Bankers Association’s quarterly Credit Conditions Index

Near-term consumer and business expectations for credit quality and availability fell in the third quarter, notably for the second straight time. The headline credit index dropped 20.1 points to 20.8, the lowest reading since the end of 2020. A reading of 50 indicates neutral expectations. The consumer credit index dropped 15.7 points to 22.9 in Q3. The business credit index fell 24.4 points to 18.8 as businesses continue to feel the impacts of high inflation, supply chain disruptions and labor shortages. 

The index is derived from a series of indices from the quarterly credit markets outlook produced by the ABA’s Economic Advisory Committee. Half of EAC members expect consumer credit availability will dwindle over the next two quarters. Only one member expects availability will strengthen. Two-thirds expect credit quality will weaken over the next two quarters. 

“While consumers continue to benefit from an exceptionally strong labor market, Russia’s invasion of Ukraine and China’s ‘zero-COVID’ policy are adding to inflationary pressures and increasing economic uncertainty,” said ABA Chief Economist and Head of Research Sayee Srinivasan.

Deteriorating expectations came after a months-long stretch of strong credit market conditions. Despite the change, Srinivasan said “jobs are plentiful, consumer demand is strong and companies continue to invest at a healthy clip. For those reasons, most bank economists remain cautiously optimistic about the trajectory of the U.S. economy over the remainder of the year.”