Economists Become More Optimistic About Credit Conditions

Bank economists are growing more optimistic about the outlook for credit conditions over the next six months, but overall do not expect conditions to improve, according to American Bankers Association (ABA) research.

ABA’s Credit Conditions Index revealed the headline credit index rose by 7.6 points to 26.8, which reflects the ongoing, gradual improvement in optimism among bank economists.

However, the index remains under the neutral reading of 50, indicating that lenders will maintain caution when extending credit to both businesses and consumers over the coming two quarters.

The consumer credit index also improved for the second consecutive quarter to reach 23.2. Even though this represented an increase of 11.7 points, the sub-50 reading suggests that credit conditions for consumers will weaken over the next two quarters.

According to ABA, the weakened credit conditions will be driven mostly by concerns about credit quality, which is not expected to improve over the next six months, rather than credit availability.

The business credit index hit 30.4 in Q2, which is the highest level in two years and a 3.4-point increase.

Although the majority of chief economists who were involved in the study expect business credit quality to deteriorate over the next months, many expect availability to improve.

Sayee Srinivasan, ABA chief, said: “The latest reading of ABA’s Credit Conditions Index reflects an uptick in optimism among bank economists as consumer spending and the labor market remain solid. Banks remain committed to lend prudently to consumers and businesses over the next six months as recession risks decline.”