The Citizens Business Conditions Index recovers in the third quarter

Vermont Business Magazine Citizens Bank’s national Citizens Business Conditions Index (CBCI) rose to 56.1 in the third quarter, regaining momentum after economic sentiment fell in the second quarter on inflation concerns. The index rose 1.7% for the quarter in Vermont, up 1.2% sequentially and down 6.8% year-on-year. This quarter’s reading extends the index’s streak to eight consecutive quarters above 50, indicating continued growth conditions for companies.

Employment strength was a key factor behind the index’s recovery as the labor market weathered the dual headwinds of persistent inflation and aggressive US Federal Reserve rate hikes. Inflation remained at higher-than-expected levels during the quarter, prompting two 75 basis point rate hikes by the Federal Reserve and raising expectations for more rate hikes.

The Treasury market continued to signal a potential slowdown on the horizon as 2-year Treasury yields remained higher than 10-year Treasury yields, known as the inverted yield curve. Although the outlook for 2023 remains uncertain, the economy continues to show momentum for the time being.

“The highest inflation in 40 years, a flagging housing market, mixed economic signals, aggressive Fed action through rate hikes and quantitative tightening have not derailed a strong labor market,” said Eric Merlis, managing director and co-head of global markets. Citizens. “There are other mixed signals in the economy, but as long as most people are reliably employed — and see wage increases like they did in the third quarter — there’s a floor to the economic impact of rate hikes.”

Four out of five components of the index were additive in the third quarter, an uptrend from moderation in the previous period. The biggest change was in the employment trend. After a “neutral” reading in the second quarter, third-quarter payrolls came in better than expected.

Against the backdrop of high single digit inflation and the Fed raising interest rates by a total of 3% year-to-date, the resilience of jobs provides important support for the broader economic picture.

Wage increases also helped bolster consumers in the environment, although inflation and higher interest rates weigh directly on household budgets.

Both the manufacturing and non-manufacturing indices from the Institute for Supply Management continue to reflect expansionary activity across the economy. Production numbers were slightly down from the second quarter as backlogs in the supply chain eased and inventory management became a bigger issue in some sectors. Services sector numbers have been rising since the second quarter, showing strength despite rate hikes.

Citizens’ commercial bank customer proprietary business data, another underlying component of the CBCI, also reflected strength over the quarter. On the other hand, new business applications were neutral during the period, improving from the second quarter but not adding to the overall CBCI score.

Taken together, these components paint a picture of robust business activity. The company’s proprietary data on the operations behind the index also showed positive sector trends, with all sectors remaining in expansionary zones and showing some recovery from second quarter levels. Utilities and materials led performance, helped by the continued rise in most commodity and energy prices.

“The CBCI for the third quarter showed a business environment where activity has picked up momentum after moderating in the second quarter. With inflation stubbornly high, the prospects for rate hikes remain a key focus,” Merlis said. “Nevertheless, pent-up demand due to the COVID pandemic seems to continue to fuel activity at high levels, as indicated by the overall trend over the past eight quarters. As the bond market continues to issue recession warnings, the prevailing job security was a key source of support during the quarter.”

The Index draws on public information and proprietary company data to provide a unique view of business conditions across the country. An index value greater than 50 indicates expansion and points to a positive business development for the next quarter. For more information on the index for the past quarter, click here.

10/25/2022. PROVIDENCE, RI—Civic Bank. “Footprint” in the Index refers to Citizens Bank coverage in Vermont and throughout the Northeast.

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