| Bank economists see both credit quality and credit availability weakening over the fourth quarter of this year and the first quarter of 2023 as consumers and businesses find it hard to keep up with the current market conditions, according to the latest Credit Conditions Index by the American Bankers Association.
Headline credit index fell by 2.8 points in the fourth quarter to 4.5 points, reflecting a consensus among bank economists that credit market conditions will continue to weaken over the next two quarters.
The index is derived from the quarterly outlook for credit markets produced by ABA’s Economic Advisory Committee (EAC), composed of chief economists from North America’s largest banks.
“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,” ABA Chief Economist Sayee Srinivasan said in a statement.
“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,” he added.
The Consumer Credit Index dropped by 6.5 points to 1.8 in the same period as consumer spending, which is the driving force of the U.S. economy, will likely slow later this year and next year as wage growth cools, pandemic-era savings dwindle and student loan repayments restart.
“Households have increasingly turning to credit cards to support spending, and credit card delinquency rates are now similar to pre-pandemic levels,” the ABA said in a statement. The resumption of student loan repayments is also seen to add financial strain for some households.
On the other hand, the Business Credit Index improved slightly by 0.9 points in the fourth quarter to 7.1, but most EAC members still expect business credit availability and quality to worsen, while some anticipate little change.
ABA said that C&I lending declined monthly since January of this year due to the high-interest rate environment, resulting in banks tightening their credit standards and focusing more on attracting deposits.
The group added that would-be borrowers have less appetite to take on new debt as concerns for economic slowdown and elevated interest rates remain, despite the strong labor market.
