Citizens announced that the national Citizens Business Conditions Index™ (CBCI) dropped to 52.9 in the second quarter of 2022, down from its eight-year peak of 59.5 at the end of the first quarter, but extending its streak to seven straight quarters above 50, indicating continued growth conditions for businesses.

Business activity remains healthy, but is clearly cooling from the prior quarter. This could reflect an economy returning to a more sustainable level – or it could indicate that conditions are poised to worsen. Consumer inflation continued to trend higher throughout the quarter, reaching an annual pace of 9.1% in the report for June. The Federal Reserve (Fed) increased interest rates twice during the quarter. The Treasury market flashed a recessionary signal as the gap between 2-year and 10-year bond yields fell below zero. Consumer sentiment touched new lows. Yet, spending held steady, as pent-up demand from COVID restrictions continued to drive economic activity.

“We are seeing several cross currents in the environment. Concern levels are high, but individual outlooks are still good,” said Eric Merlis, managing director, Global Markets, Citizens. “Companies are still experiencing growth and maintaining positive momentum, and consumers are showing resilience. We see markets trying to calibrate expectations with these conflicting signals.”

Three of five components of the Index were additive in the second quarter, another sign of moderating activity after five-of-five were positive in Q1. Both the manufacturing and non-manufacturing indexes from the Institute for Supply Management trended in expansionary territory. However, they also showed moderation from Q1. The manufacturing index peaked around the first quarter of 2021, when the COVID rebound was in full swing. The non-manufacturing index peaked in the fourth quarter of 2021.

The index saw continued strength in the proprietary activity of the bank’s commercial banking clients, another underlying component of the CBCI. On the other hand, applications for new business formation were down in the period, detracting from the CBCI and indicating a pause from Q1.

Meanwhile, employment trends were neutral for the period. This is particularly notable at a moment when growth is slowing and recession fears have increased. After the unexpected GDP contraction in the first quarter, a second-quarter contraction could signal an economic recession, according to the standard definition. A typical recession is accompanied by a weak labor market and higher unemployment – but the scenario could evolve differently in an environment where the job market is already contending with a shortage of labor. If the U.S. experiences a “jobful” slowdown, consumer activity could remain supported – more than in a traditional recession.

While the path of inflation is still uncertain, this level of business activity could prove to be sustainable. As policymakers continue to tighten monetary policy, and as supply-chain pressures ease, the outlook for inflation could be for gradual moderation.

“It is not surprising that we came down from last quarter’s peak given current market volatility and Fed action to curb inflation,” Merlis added. “We may be at a sustainable level of business activity, but there are still headwinds that could push activity lower.”

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