Bank economists expecting credit conditions to worsen

Bank economists expect credit conditions will worsen over the next six months as economic headwinds increase, according to the American Bankers Association’s latest Credit Conditions Index.

The index, which examines a suite of indices derived from the quarterly outlook for credit markets, is produced by the Economic Advisory Committee of chief economists from major U.S. banking institutions. A reading above 50 indicates positive expectations. 

According to the report, high inflation continues to outpace wage growth, leading to the personal savings rate falling to its lowest point in more than a decade. 

Revolving credit has started to increase again after having fallen during the pandemic as credit conditions normalize. The headline credit index fell again in the fourth quarter, dropping 10.8 points to a near-record low of 10, to its weakest reading since the start of the pandemic. Following more than a year of credit market recovery in 2021 and early this year, near-term expectations for credit availability and quality fell for both businesses and consumers for the third straight quarter due to inflation and rising interest rates. The consumer credit index fell 12.9 points to 10 as well. The business credit index fell 8.8 points to 10. 

 “Consumers continue to benefit from a strong labor market, but inflation and the Fed’s efforts to fight it are clearly weighing on credit market conditions,” said ABA Chief Economist and Head of Research Sayee Srinivasan. “Given the Fed’s clear signal that it expects to continue raising rates until inflation is contained, it is not surprising that bank economists’ short-term expectations for credit markets have deteriorated. At the same time, the EAC’s forecast conveys cautious optimism that the Fed can manage a soft landing and avoid a recession.”

 EAC members downgraded their expectations for overall economic growth this year from 1.6 percent to -0.1 percent. The EAC expects the Fed to pull off a soft landing, with the Fed Funds Rate peaking late this year or in early 2023 and core PCE inflation falling to less than 3 percent by next summer.  

“Committee members do not view a recession as inevitable even as credit conditions tighten for businesses and consumers,” Srinivasan said. “However, the probability of an economic downturn is higher in 2023 as rate hikes intended to cool inflation also trigger slower growth.”