ABA Report: Bank Economists Growing More Optimistic About Business Credit, Prospect for Soft Landing

Bank economists are expressing increased optimism about the outlook for business credit and the prospect of a soft landing for the U.S. economy 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). The EAC includes chief economists from North America’s largest banks. Readings above 50 indicate that, on net, bank economists expect business and household credit conditions to improve, while readings below 50 indicate an expected deterioration.

The Credit Conditions Index rose for the third consecutive quarter and now stands at 28.8. The index reflects a divergence in credit conditions for businesses vs. consumers: EAC members expressed more optimism about the quality and availability of credit for businesses, but most continue to expect credit quality for consumers will weaken over the remainder of the year. Further, EAC members estimate the probability of a recession in 2024 has fallen to 20% (down from 30% last quarter) and expect the Federal Reserve to cut interest rates at least once before the end of the year.

“ABA’s latest Credit Conditions Index is consistent with an economy that is growing slowly but sustainably,” said ABA 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.”

For the third quarter release:

• The Headline Credit Index increased 2.0 points in Q3 to 28.8, representing the third consecutive quarter of improvement and its highest reading in more than two years. However, the sub-50 reading still indicates that overall credit conditions are expected to weaken over the next six months. As a result, lenders are likely to continue exercising prudence when extending credit to businesses and consumers.
• The Consumer Credit Index fell a modest 0.7 points to 22.5 in Q3. The majority of bank economists expect credit availability to remain unchanged but anticipate credit quality to weaken over the next six months. Overall, banks economists are more optimistic than they were in 2023 but still expect weaker credit conditions during the second half of the year.
• The Business Credit Index improved 4.6 points in Q3 to 35.0, the highest level in more than two years. Most bank economists anticipate credit availability will remain stable, but opinions are more divided on credit quality, with respondents evenly split between expectations of deterioration vs. holding steady. While recent movement in the index is encouraging, the sub-50 reading points to weakening credit conditions for businesses over the next two quarters.

Read the full report with detailed charts and a discussion of the broader economic context.

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 weighted equally 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.