- Key insight: A new survey of consumer credit companies by the American Financial Services Association found they have a negative outlook on business conditions for the first time in two years.
- What's at stake: The downturn in expectations is likely a reflection of the potential for higher interest rates, as well as a decline in overall loan performance.
- Forward look: Inflation and the unemployment rate are two important factors to watch, observers said.
Consumer credit firms' outlook for business conditions deteriorated during the second quarter, reflecting a reversal in interest rate expectations, as well as a sharp decline in overall loan performance, according to a recent survey of finance lenders.
The six-month outlook for business conditions fell into negative territory for the first time in two years, the American Financial Services Association said Thursday in its latest consumer credit conditions study. The survey captured members' sentiment about the business environment from April through June, and measured assessments of how conditions are likely to unfold through December.
Lenders were less upbeat about second-quarter conditions than they were in the first quarter of the year, with more than half of survey respondents reporting a decline in loan performance for borrowers with lower credit scores, according to the study. The near-term outlook remained cloudy, with more respondents than not expecting overall loan performance, and subprime loan performance, to worsen somewhat or considerably between now and the end of the year.
The lenders' forecast, which was last negative in the second quarter of 2024, came against the backdrop of an economy that Timothy Gill, AFSA's chief economist and vice president of research, characterized as "fairly unremarkable."
Gill noted that gross domestic product has been growing, and the U.S. labor market is stable. But he also said consumers continue to feel pessimistic about inflation and affordability, and
"It doesn't surprise me, given the financial strains and the change in interest rate expectations, that those pieces of the puzzle went negative this time around," Gill told American Banker.
The American Financial Services Association, a trade group for consumer credit companies, has
The survey questions are designed to capture lenders' perspectives about how certain conditions have changed from the prior quarter, and how the situation may evolve in the coming months. They're centered on loan demand, the cost of funds and the performance of outstanding loans, looking back at the most recent quarter and ahead to the next six months.
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The survey's second-quarter results, which were collected from 38 respondents in June and July, revealed an overall "net improving index" of -5.3. A negative result indicates more respondents reported worsened conditions than improved conditions.
The overall index has now been negative for the past four quarters. It came in at -15 for the first quarter of this year and -13.6 for the fourth quarter of last year, reflecting cynicism about business conditions, driven by concerns about inflation and higher prices.
Its most recent peak of 21.4 came during the fourth quarter of 2024, following the presidential election.
The six-month outlook index came in at -13.2, according to AFSA's report. That's a notable decline from an index of 19.5 reported in the first quarter.
The latest survey results highlight the reality that higher interest rates drive up funding costs for consumer credit firms. More respondents said their cost of funds deteriorated during the quarter, likely a result of uncertainty about the Federal Reserve's interest rate plans.
The survey also found that total loan demand rose sharply during the second quarter, which Gill views as both good news and bad news. On the positive side, stronger demand shows that consumers with higher credit scores are willing and able to take on debt. More negatively, the trend shows that subprime borrowers may be facing higher levels of financial stress.
"Maybe there's a little bit of room for caution there," Gill said. Loan demand among subprime borrowers "could be more out of necessity as these households face higher bills and higher stresses."
Some of that stress is due to high energy prices, a sore spot amid the U.S.-Iran war, which is now in its sixth month. U.S. gas prices are currently more than $4 per gallon on average, up from roughly $3 per gallon before the war started, according to data from the U.S. Energy Information Administration.
According to AFSA's survey, loan performance dipped during the second quarter. While 50% of respondents said that loan performance had remained the same in the second quarter compared with the first, 34.2% said it had deteriorated, and 15.8% said it improved.
A downturn in loan performance is evidence that some consumers are struggling, according to Ted Rossman, a principal consumer finance analyst at Money Management International, a credit counseling nonprofit.
Recent data from Money Management International showed that financial stress among American households worsened during the first half of the year, as credit counseling volume rose 9.5% year over year, and average unsecured debt among new clients increased 3.8% to nearly $40,000.
The forecast for the U.S. unemployment rate, which was 4.2% in June, is relatively stable, but "a dramatic change [upward] is a potential worry for lenders," Rossman said.
Similarly, inflation is a critical component for consumer credit providers to watch, Gill said.
"If that were to continue, that would be a major positive on the funding-cost side, as well as on the loan-performance side," Gill said.
