ABA: Credit conditions will weaken in next six months

Credit conditions will soften over the next six months as the economy weakens and the Federal Reserve continues to rein in inflation by raising interest rates, according to the American Bankers Association’s latest Credit Conditions Index.

The headline credit index slightly increased but remained near its lowest point since the start of the pandemic at 12.5, indicating that bank economists expect credit quality to worsen more than credit availability. The index for consumer credit improved 3.6 points to 13.6. The index for business credit improved 1.4 points to 11.4, with the majority of EAC members expecting both the availability and quality of business credit to weaken over the next two quarters.    

The report was released shortly after the EAC’s 2023 economic forecast projected no economic growth this year before a 1.6 percent expansion in 2024 as the Fed begins to once again reduce interest rates. The index, which examines data from the quarterly outlook for credit markets from the ABA’s Economic Advisory Committee, found slightly more optimistic short-term expectations for business and consumer credit quality and availability during the first quarter of this year than the previous quarter. 

Any reading above 50 indicates that bank economists expect business and household credit conditions to strengthen, while any reading below indicates an expected deterioration. 

ABA Chief Economist Sayee Srinivasan said measures of consumer financial stress remain muted and companies continue to add employees even as the overall outlook weakens. 

 “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,” he 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.”