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

The six-month outlook for consumer and business credit markets softened this quarter, according to the American Bankers Association’s latest Credit Conditions Index released today. Bank economists expect the credit environment to normalize following a period of unusually strong credit availability and quality, which were underpinned by robust consumer savings amid federal stimulus payments and low interest rates.

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 second quarter 2022 report finds that near-term expectations for credit quality and availability fell sharply for consumers and businesses in March after a modest decline in the first quarter. The index suggests that, over the next six months, credit quality and availability is expected to weaken relative to the strong credit environment seen in the preceding three quarters. EAC economists have also downgraded their forecasts for real economic growth in 2022 from 3.3% to 2.5% (Q4/Q4) due to high inflation and new headwinds related to the Russo-Ukrainian War. 

“Russia’s invasion of Ukraine, sanctions imposed on Russia’s economy and new COVID-related shutdowns in China have prolonged supply chain disruptions and added to inflationary pressures,” said ABA Chief Economist and Head of Research Sayee Srinivasan. “At the same time, the labor market remains strong and financial stress among both consumers and businesses is historically low. Credit conditions for households and businesses have been remarkably strong in recent quarters, but they are likely to normalize to more typical levels amid an expected tapering of economic growth as the Fed raises rates to combat high inflation.”

In the second quarter of 2022:

• The Headline Credit Index fell 22.6 points to 40.9 in Q2 after a modest decline in Q1. The current reading is the lowest since the end of 2020 and has fallen below 50, signaling that on balance bank economists expect credit market conditions to normalize over the next six months.
• The Consumer Credit Index fell 26.0 points to 38.6 in Q2, as roughly three-fourths of EAC members expect consumer credit availability to stay the same or weaken over the next two quarters while one-fourth expect it to strengthen. The EAC members reached greater consensus (and shared pessimism) regarding credit quality, as no respondent expects consumer credit quality to improve over the next six months.
• The Business Credit Index fell 19.3 points to 43.2 in Q2, indicating that EAC members expect business credit conditions to soften over the next six months. Roughly four-in-five EAC members expect business credit availability to remain the same or improve, while 90% expect business credit quality to decline or hold steady. 

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.