ABA Economic Advisory Committee Forecasts Credit Conditions Softening Over Remainder of Year

Jul 5, 2023Banks & Credit Unions, News

The Economic Advisory Committee of the American Bankers Association (ABA), which is made up of bank economists, predicts credit conditions to soften throughout the rest of the year due to higher borrowing costs and a slowing economy. The ABA’s most recent Credit Conditions Index generated a paltry reading of 7.3, down from 12.5 at the beginning of 2023. Any reading below 50 indicates that credit market conditions will likely crumble over the next six months. 

Sayer Srinivasan, ABA Chief Economist, said that lenders “are preparing for weakening economic growth and increasing financial challenges for consumers and businesses as the year progresses,” according to American Banker. For the first quarter, banks reported great credit quality metrics, despite more anxieties on commercial real estate (CRE) as well as higher cost pressures for small-business owners.

More lenders have started increasing reserves for potential loan losses, and have warned that CRE could face more challenges as office properties endure remote-work trends. Charles Scharf, CEO and President of Wells Fargo, said the bank—which has $1.9 trillion in assets—has steadily cut its office space to minimize losses.

During the first quarter, overall loan growth dwindled due to decreased demand and banks utilizing more reserved underwriting. According to S&P Global Market Intelligence, median first-quarter loan growth among banks with $10 billion or less in assets fell to 1.3 percent from 3 percent the quarter before, and 3.4 percent in the third quarter of 2022. 

Though lending activity from the second quarter of the year is expected to also be slow, Srinivasan said the Fed’s attempts to control inflation have started showing meaningful results, “reducing and need for additional Fed rate hikes,” and “underlying strength in the labor market will provide a buffer for consumers and businesses.”

The federal consumer price index for May found a price increase of four percent from a year earlier, which was down from a 4.9 percent price increase in April and nearly half the rate of inflation from a year prior. 

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