American bankers expect weak credit through 2024

The American banking industry anticipates a worsening of credit conditions through the end of the year 2024.

Based on the new Credit Conditions Index from the American Bankers Association, which came out this week, economists at U.S. banks expect credit conditions to worsen over the next six months.

According to the Q4 2023 report, most EAC economists think that both the quality of credit and the availability of credit for individuals and businesses will get worse over the next six months:

Consumer spending has been the main driver of the U.S. economy. However, it will likely slow down later this year and next year as wage growth slows, savings from the pandemic run out, and student loan payments start again. Credit card delinquency rates are now close to what they were before the financial crisis, but they are still much lower than in the 1990s and 2000s.

Commercial and industrial loans to businesses have been down for most of 2023, which shows that many business owners are taking less risk. Business investment is only likely to grow at a 1% annualized rate over the next year, which aligns with what the EAC thinks. Still, financial stress is pretty good, and strong customer demand has helped businesses make more money.

Sayee Srinivasan, the chief economist for the American Bankers Association, said, "The top bank economists on our Economic Advisory Committee predict slow growth in household spending and business investment over the next four quarters, with a small pick-up in the second half of next year." So, the current Credit Conditions Index from the American Bankers Association shows that banks will continue to be more careful about lending money until at least the end of the year.

Highlights of the Fourth Quarter

The Headline Credit Index dropped by 2.8 points in Q4 and now stands at 4.5; this shows that bank economists agree that the credit market will worsen over the next two quarters. Because of this, people and businesses can expect banks to continue to be careful about giving them credit for the rest of the year.

In Q4, the Consumer Credit Index dropped from 6.5 to 1.8. In the next six months, everyone on the EAC thinks that the quality of consumer credit will go back to what it was like in the past, and almost everyone thinks that the quantity of credit will also go down. Overall, a score below 50 means that consumer credit will likely worsen over the next two quarters.

In Q4, the Business Credit Index increased by 0.9 points to 7.1. As a group, most EAC members think that the access and quality of business credit will worsen. However, some members believe that quality and availability will remain the same. A score below 50 means that business loans will likely get more challenging over the next two quarters.