Respondents: Credit Conditions to Soften Even More in 2H 2023

Economists working at the nation’s largest banks expect consumer and business credit conditions to soften over the remainder of 2023 due to the economic headwinds, according to a survey released this week. In fact, anticipations haven’t been this low since mid-2020 and are even lower than mid-2008.

The latest Credit Conditions Index summary released by the American Bankers Association examines a suite of indices derived from the quarterly outlook of chief economists from North America’s biggest banks. Readings above “50” indicate bank economists expect business and household credit conditions to improve, while readings below 50 indicate an expected deterioration.

Currently, most surveyed economists believe credit quality and availability will weaken over the next six months, with nobody expecting either of these metrics to improve this year. “While credit quality and availability have been remarkably resilient since the onset of the pandemic, recent index readings foretell softening credit conditions for both consumers and businesses,” a news release states. “Members expect that lenders will grow more cautious, particularly given elevated interest rates.”

At the same time, bank economists expect inflation to continue to ease, reducing the need for additional rate hikes by the Federal Reserve, it states. Underlying strength in the labor market will provide a buffer for consumers and businesses.

In the third quarter:

• The Headline Credit Index improved slightly in the upcoming third quarter to 7.3, increasing 1.5 points, while remaining near a post-pandemic low. The sub-50 reading indicates consensus among bank economists that credit market conditions will weaken. “As a result, banks are expected to exercise caution when extending credit to both businesses and consumers over the remainder of the year,” it states.
• The Consumer Credit Index improved 2.6 points to 8.3 in the upcoming third quarter. No economist surveyed expects consumer credit availability or quality to improve in the next six months (and most expect both to worsen). The sub-50 reading indicates that credit conditions for consumers are likely to weaken over the next two quarters.
• The Business Credit Index improved marginally by 0.5 point in the upcoming third quarter and now stands at 6.3. As a group, economists surveyed are slightly more pessimistic regarding business credit availability than quality, although both metrics are expected to worsen. The sub-50 reading indicates credit conditions for businesses are likely to weaken over the next two quarters.

You can read the full report with detailed charts and a discussion of the broader economic context.