ABA report: Bank economists expect credit conditions to weaken

Bank economists expect credit conditions to soften over the next six months as the economy slows and the Federal Reserve considers additional steps to rein in inflation, according to the Credit Conditions Index released today by the American Banker Association’s Economic Advisory Committee.

The latest report finds slightly less pessimistic near-term expectations for business and consumer credit quality and availability in the first quarter of 2023 compared to last year’s fourth quarter, as EAC members continue to expect credit conditions to deteriorate over the next six months. The Headline Credit Index improved slightly in the first quarter, increasing 2.5 points to 12.5, though it remained at its lowest point since the onset of the pandemic. The Consumer Credit Index rose 3.6 points to 13.6. The Business Credit Index improved 1.4 points to 11.4.

While the committee noted that credit market conditions have been remarkably resilient since the onset of the pandemic, the index readings foretell weakening consumer and business spending along with elevated risk of a growth pause or mild recession this year. Expectations of reduced demand led EAC members to downgrade their forecasts for real economic growth in 2023 from 0.6% to no growth. However, a slowdown should help drive inflation closer to the Fed’s 2% target, potentially allowing the Fed to begin to lower interest rates late this year, according to the EAC.

“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,” said ABA Chief Economist Sayee Srinivasan. “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.”