Citizens Business Conditions Index dips in Q2 amid interest rate hikes

PROVIDENCE – A rise in unemployment insurance claims and a slowdown in the formation of small businesses caused the Citizens Business Conditions Index, or CBCI, to drop to 48.5 in the second quarter, Citizens Financial Group Inc. announced July 27.

The index draws from public information and proprietary corporate data to establish a unique view of business conditions across the country, according to Citizens. An index value greater than 50 indicates expansion and points to positive business activity for the next quarter.

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The underlying components of the index show the business environment is mixed as policymakers try to curb inflation with interest rate hikes without too much collateral damage.

While the labor market has started to show some softening in the face of aggressive Federal Reserve interest rate hikes and the manufacturing sector slowed given high inventory levels and a shift in consumption toward services, Citizens’ proprietary data on client revenue continued to be strong across most industries during the second quarter, according to a news release.

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Consumer services and health care 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, Citizens, said in a statement. “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.”

According to the release, 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 Institute for Supply Management, or 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 nonmanufacturing component of the index grew as consumers spent more on services and companies in these sectors were better able to pass on costs.
  • The second-quarter CBCI revealed a business environment that is struggling to adapt to the interest rate hike campaign from the Fed despite a pause in rate increases in June. Up until recently, the labor market has had a stabilizing effect as business conditions search for a new normal.

“The second-quarter CBCI shows a business environment where activity has slowed as interest-rate hikes seem to be working to curb inflation,” Merlis said. “All eyes will be on the job market to see if the Fed can balance its efforts to fight inflation while minimizing impacts on employment.”