Citizens Business Conditions Index drops in second quarter

Index, which attempts to rate future health of business climate, fell to 48.5 – or below 50.0 mark that indicates growth

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The Business Conditions Index from Citizens – a formula intended to measure the health of the business market – dropped below the key 50.0 line in the second quarter, the bank said Thursday.

The drop, to 48.5, marks the second time in the past three quarters that the index is below 50 – a value that is believed to indicate expansion and points to positive business activity for the next quarter.

The Index, which draws from public information and proprietary corporate data, jumped to 53.9 in the first quarter. The index was at 48.5 in the fourth quarter of 2022.

Citizens officials said rapid interest rate increases to curb inflation continue to weigh on economic conditions – as do a rise in unemployment insurance claims and a slowdown in small business formation.

While the labor market has started to show some softening in the face of aggressive Federal Reserve rate hikes and the manufacturing sector slowed given high inventory levels and a shift in consumption towards services, Citizens’ proprietary data on client revenue continued to be strong across most industries during the second quarter. Consumer Services and Healthcare continue to be among the top sectors due to their ability to pass on costs to customers.

“The overall U.S. economy has begun to slow in the second quarter even though Citizens’ middle market and mid-corporate clients continue to fare very well,” Eric Merlis, managing director and co-head of global markets at Citizens, said. “The Fed’s tough medicine seems to be working and the rate of inflation is falling, with the labor market beginning to show some weakness and new business formation stalling.”

Merlis said the underlying components of the Index show the business environment is mixed as policy-makers try to thread the needle and curb inflation without too much collateral damage. Three of five components pulled down the Index level, while two were positive.

· New business applications decreased in most states;

· Initial jobless claims increased for the quarter and national employment numbers started to soften;

· The ISM manufacturing index decreased as the sector is more sensitive to rising interest rates;

· The proprietary activity data of Citizens’ commercial banking clients was broadly strong, suggesting that the conditions at many middle-market and mid-corporate businesses remain positive;

· The ISM non-manufacturing component of the Index grew as consumers spent more on services and companies in these sectors were better able to pass on costs.

The index is way down from its nine-year high in the first quarter of 2022, when it was at 59.5.