Bank economists are becoming more optimistic about the business credit outlook and the potential for a soft economic landing, according to the American Bankers Association’s third quarter Credit Conditions Index.
The index increased for the third straight quarter to 28.8, its highest reading in more than two years, which still indicates members expect consumer credit quality will weaken over the remainder of 2024.
The summary includes a suite of indices taken from the quarterly outlook for credit markets from the ABA’s Economic Advisory Committee of leading economists from North America’s largest banks. Readings above 50 show bank economists expect business and household credit conditions to improve, while any reading below that number shows expected deterioration.
The index for consumer credit fell by less than a point to 22.5 as the majority of bank economists predicted credit availability to be unchanged even as credit quality weakens over the next six months. The index for business credit increased 4.6 points to 35.0, its highest score in more than two years. Bank economists predict credit availability will remain stable, but respondents are split between expecting credit quality to deteriorate or be unchanged.
Only 20 percent of EAC members predict a recession this year, down from 30 percent in the second quarter. Members expect the Federal Reserve will cut interest rates at least once before the end of the year, with the first rate cut coming in either July or September.
“ABA’s latest Credit Conditions Index is consistent with an economy that is growing slowly but sustainably,” said Chief Economist Sayee Srinivasan. “While it is too soon to declare victory, the Federal Reserve has thus far managed to lower inflation without undermining the labor market — no easy feat. Still, businesses remain cautious about making new capital investments, and consumer financial stress remains a key factor to watch.”
Consumer spending has been strong so far this year, but real personal consumption expenditures fell in April, according to the report. Real disposable income has fallen over the last three months. Household financial stress is near its lowest mark in two years, according to the report, and recent inflation data has been positive. The headline inflation rate fell to 3.3 percent in May, and core CPI was also lower than expected.
“With job growth remaining strong and inflation edging closer to the Fed’s 2 percent target, the share of households reporting difficulty paying the usual expenses remains significantly below the elevated readings of 2022-23,” according to the report. “The metric has ticked up modestly over the last two months, however, and consumers aged 18-39 are twice as likely to face difficulty paying usual expenses as those over age 65.”
