Economists expect credit conditions will weaken in coming months

Credit conditions will “weaken modestly” in the next six months as businesses and consumers become more cautious amid heightened uncertainty, according to the American Bankers Association’s latest Credit Conditions Index. .The report was released March 25. The Headline Credit Index declined for the first time in more than a year, according to the report, dropping 15.7 points in the first quarter to 41.3, according to the report. Any reading under 50 suggests that overall credit conditions are expected to weaken over the next six months. The index reviews a suite of indices taken from the quarterly outlook on credit markets from the Economic Advisory Committee, which includes chief economists from the largest banks on the continent. Expectations for credit quality and credit availability weakened. The Consumer Credit Index fell 20.8 points to 37.5 amid credit quality concerns. Half of economists expect a decline in consumer credit quality, while the rest anticipate it will be steady. “More positively, most respondents expect consumer credit availability to hold steady, which suggests banks are likely to maintain a cautious but stable lending posture over the next six months,” according to the report. The Business Credit Index fell 10.6 points to 45.0 as the business credit market is healthier than consumer credit, according to the EAC. Half of bank economists anticipate the availability and quality of business credit to remain as is. Consumer spending growth is expected to fall to 2.1 percent this year from 3.1 percent in 2024. The Economic Advisory Committee sees the potential for tariff-induced price increases to weaken spending. EAC members have increased their end-of-year core PCE inflation forecast to 2.6 percent from 2.1 percent in Q4. The EAC still expects job growth, continued low unemployment and economic growth of approximately 2 percent, according to the ABA.“The labor market remains healthy by most measures, real wages are rising, and household net worth is at a record high across the income distribution,” according to the report. “These factors provide a degree of reassurance that, while consumer spending may slow, it should remain above water.” ABA Chief Economist Sayee Srinivasan said the index “reflects a slowing but still healthy economy, with positive payroll growth, low unemployment and rising real wages indicating continued strength in the labor market. “At the same time, trade policy uncertainty and the potential for higher prices may dampen near-term economic prospects,” Srinivasan said. “Pro-growth tax policy and continued regulatory reforms should counteract some of these factors as the year progresses.”