ABA Credit Conditions Index: Credit Market Conditions Expected to Weaken in Months Ahead Amid High Inflation

While the consumer and business credit markets remain on generally solid footing, bank economists expect credit conditions to weaken over the next six months, according to the American Bankers Association’s latest Credit Conditions Index released today. 

The latest summary of ABA’s Credit Conditions Index examines a suite of indices derived from the quarterly outlook for credit markets produced by ABA’s Economic Advisory Committee (EAC), which is comprised of chief economists from major banking institutions across North America. Readings above 50 indicate that, on net, the economists expect business and household credit conditions to improve, while readings below 50 indicate an expected deterioration.

The third quarter 2022 report finds that near-term expectations for credit quality and availability fell sharply for the second consecutive quarter for both consumers and businesses. The latest readings offer a strong contrast to the credit market conditions in 2021 and early 2022 and reflect ongoing headwinds stemming from inflation and supply chain disruptions. EAC members downgraded their forecasts for real economic growth in 2022 from 2.5% to 1.6% (Q4/Q4).

“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. 

In the third quarter:

• The Headline Credit Index fell again in Q3, dropping 20.1 points to 20.8, the weakest reading since the end of 2020. The sub-50 reading indicates that bank economists expect credit market conditions to deteriorate over the next six months. 
• The Consumer Credit Index fell 15.7 points to 22.9 in Q3. Half of EAC members expect consumer credit availability to fall over the next two quarters, while only one expects it to strengthen. Regarding consumer credit quality, two-thirds expect credit quality to deteriorate over the next two quarters, while none expect it to improve. Overall, the sub-50 reading indicates that EAC members expect consumer credit conditions to weaken over the next six months.
• The Business Credit Index fell 24.4 points to 18.8 in Q3. Half of EAC members expect business credit availability to fall over the next two quarters, while only one expects it to strengthen. Meanwhile, all but two EAC members expect business credit quality to deteriorate over the next six months, and none anticipate an improvement. Overall, the sub-50 reading indicates that EAC members expect business credit conditions to weaken over the next six months.

“As the Fed raises rates to combat inflation, the outlook for credit markets has unsurprisingly weakened,” said Srinivasan. “The good news, however, is that jobs are plentiful, consumer demand is strong and companies continue to invest at a healthy clip. For these reasons, most bank economists remain cautiously optimistic about the trajectory of the U.S. economy over the remainder of the year.”

The full report with detailed charts and a discussion of the broader economic context is available here.

About the Credit Conditions Index

The ABA Credit Conditions Index is a suite of proprietary diffusion indices derived by the American Bankers Association from surveys of bank chief economists from major North American banking institutions. Since 2002, the bank economists have forecasted credit quality and availability for both businesses and consumers, indicating whether they expect conditions to improve, hold steady, or deteriorate over the ensuing six months. Readings above (below) 50 indicate that, on net, these expert business analysts expect credit market conditions to improve (deteriorate). Input from the bank economists is equally weighted in the indices. This data will remain anonymous, but historical index values are available upon request.

Answers to Frequently Asked Questions about the ABA Credit Conditions Index can be found in an Appendix attached to the outlook. This report and all previous reports can be found at https://www.aba.com/news-research/research-analysis/aba-credit-conditions-index.