US bank economists expect credit conditions to weaken over the next six months

The American Bankers Association’s latest Credit Conditions Index was released on Tuesday:

  • Headline Credit Index fell 2.8 points in Q4 to 4.5, reflecting a consensus among bank economists that credit market conditions will continue to weaken over the next two quarters
  • Consumer Credit Index worsened 6.5 points to 1.8 in Q4
  • Business Credit Index improved marginally, by 0.9 points in Q4 to 7.1
  • “Top bank economists serving on our Economic Advisory Committee are forecasting weak growth in household spending and business investment over the next four quarters before a modest pickup in the second half of next year,” said ABA Chief Economist Sayee Srinivasan. “Accordingly, ABA’s latest Credit Conditions Index indicates that banks will continue to exercise greater caution in lending decisions until at least the end of the year.”

More from the report and why the results are of note:

  • consumer spending has been the driving force behind the U.S. economy but is likely to slow later this year and next year as wage growth cools, pandemic-era savings dwindle and student loan repayments restart
  • Households have increasingly turned to credit cards to support spending, and credit card delinquency rates are now similar to pre-pandemic levels (but well below levels from the 1990s and 2000s)
  • Among businesses, commercial and industrial lending has fallen for most of 2023, reflecting a “risk-off” posture among many business owners. EAC forecasts reflect this sentiment, as business investment is expected to grow at just a 1% annualized rate over the next year. Still, financial stress remains relatively low, and resilient consumer demand has boosted business cash flow.

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 article was written by Eamonn Sheridan at Source