ABA Credit Conditions Index: Bank Economists Expect Credit Conditions to Weaken over Next Six Months

Bank economists expect credit conditions to weaken over the next six months due to mounting economic headwinds, 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 fourth quarter 2022 report finds that near-term expectations for credit quality and availability for businesses and consumers alike fell for the third consecutive quarter. Following steady credit market recovery in 2021 and early 2022, the latest readings reflect persistent economic headwinds, most notably inflation and rising interest rates. In response, EAC members downgraded their forecasts for real economic growth in 2022 from 1.6% to -0.1% (Q4/Q4).

“The latest survey of the EAC shows that, on balance, committee members do not view a recession as inevitable even as credit conditions tighten for businesses and consumers,” said ABA Chief Economist Sayee Srinivasan. “However, the probability of an economic downturn is higher in 2023 as rate hikes intended to cool inflation also trigger slower growth.”

In the fourth quarter:  

• The Headline Credit Index fell again in Q4, dropping 10.8 points to 10.0, the weakest reading since the onset of the COVID-19 pandemic. The sub-50 reading indicates that bank economists expect credit market conditions to deteriorate over the next six months, which is consistent with the Federal Reserve raising interest rates.
• The Consumer Credit Index fell 12.9 points to 10.0 in Q4. No EAC members expect consumer credit availability to improve over the next six months, while more than two-in-three expect it to worsen. Nearly all EAC members expect consumer credit quality to worsen over the next two quarters. 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 8.8 points to 10.0 in Q4. All but two EAC members expect both business credit availability and business credit quality to worsen over the next two quarters, and no members expect either to strengthen. Overall, the sub-50 reading indicates that EAC members expect business credit conditions to weaken over the next six months.

“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 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.”

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

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.