ABA Report: Bank Economists Expect Slowing Economic Growth to Tighten Credit Conditions

Bank economists expect credit conditions to weaken over the next six months as economic growth slows and interest rates trend higher, 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, the bank economists expect business and household credit conditions to improve, while readings below 50 indicate an expected deterioration.

EAC members expect banks to tighten credit standards this year in reaction to still-elevated inflation and higher interest rates leading to weaker growth in consumer spending and business investment. As a result, the Q2 2023 report foresees that the quality and availability of credit will decline over the next six months for both consumers and businesses. The survey was conducted after recent stress in the banking sector.

“ABA’s latest Credit Conditions Index recognizes that recent strong credit quality will be challenged by heightened uncertainty and broader economic headwinds this year,” said ABA Chief Economist Sayee Srinivasan. “Lenders are responding with cautious and prudent underwriting.”

In the second quarter:

• The Headline Credit Index fell in Q2 to 5.8, decreasing 6.7 points to its lowest point since the onset of the pandemic. The reading indicates broad-based expectations for weaker credit market conditions over the next six months among bank economists, and banks are likely to grow more cautious about extending credit. 
• The Consumer Credit Index fell 7.9 points to 5.8 in Q2. EAC members expect credit availability to deteriorate more than credit quality, though almost all expect both to decline. The sub-50 reading indicates that consumer credit conditions are likely to weaken over the next six months.
• The Business Credit Index fell 5.6 points to 5.8 in Q2. All EAC members expect business credit availability will deteriorate in the next six months, and most expect business credit quality to deteriorate. The sub-50 reading indicates that EAC members expect that overall credit conditions for businesses will continue to weaken 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 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.