Consumer Spending Impacts from Federal Reserve Rate Cuts

Historical Impact of Rate Cuts on Consumer Spending

Historical rate cuts have led to mixed impacts on consumer spending. While some consumers adapt to higher rates, others show resilience despite elevated prices. Retailers note that interest rates and economic conditions significantly influence demand and spending patterns, highlighting the complex relationship between rate cuts and consumer behavior.

"So we're now 6.5%, 6.4% ish. We've rates have come down 50 odd basis points the last several weeks in expectation of this cut." --- (HD, conference, 2024/09/04)

"In addition, changes in fuel, utility, and food costs, interest rates, and economic outlook may impact customer demand and our ability to forecast consumer spending patterns." --- (AMZN, sec filing, 2024/Q2)

"This normalization, combined with the cumulative impact of higher prices on consumer budgets, is resulting in continued soft trends in discretionary categories, most notably in Home and Hardlines." --- (TGT, earning call, 2025/Q1)

"And you mentioned the lockup effect, just simply don't know. Is it a factor of folks waiting for rates to decline or is there a mindset shift that becomes accustomed to a higher rate environment and says this is normal, I have to upsize, I have to improve in place." --- (HD, conference, 2024/04/04)

"Consumers remain surprisingly resilient despite a challenging backdrop of significantly elevated prices compared to just a few years ago." --- (TGT, earning call, 2025/Q1)

Current Economic Conditions and Consumer Sentiment

Current economic conditions show mixed signals for consumer sentiment. While consumers currently have money and wages are rising, concerns about inflation and geopolitical tensions persist. Future risks could impact spending, but for now, the sentiment remains relatively positive, especially among lower-income segments.

"In the future, if economic conditions deteriorate, it may lead to a further decrease in consumer spending or a deterioration in consumer credit, and net revenues and provision for credit losses in Platform Solutions would likely be negatively impacted." --- (GS, sec filing, 2024/Q1)

"But I would put as a risk out there. And I would tell you that if you look at future issues, so forget current, the consumer's got money, wages are going up at the low end, companies are making more profits." --- (JPM, event transcript, 2024/05/20)

"Our results are inherently unpredictable and may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic and geopolitical conditions and customer demand and spending (including the impact of recessionary fears), inflation, interest rates, regional labor market constraints, world events, the rate of growth of the internet, online commerce, cloud services, and new and emerging technologies, and the various factors detailed below." --- (AMZN, press release, 2024/04/30)

"Business Environment During the second quarter of 2024, economic activity continued to be impacted by concerns about inflation and ongoing geopolitical stresses, including tensions with China and the conflicts in Ukraine and the Middle East." --- (GS, sec filing, 2024/Q2)

"And on the right, you can see that on the whole, wages are keeping pace with inflation with the lowest income segment seeing the largest relative gains. So for consumers, to all intents and purposes, we're back to normal with no obvious signs of deterioration." --- (JPM, event transcript, 2024/05/20)

Sector-Specific Spending Trends Post-Rate Cuts

Post-rate cuts, consumer spending trends vary by sector. The entertainment sector, particularly Disney and Netflix, anticipates revenue growth despite challenges, indicating resilience. In contrast, Tesla highlights macroeconomic pressures affecting automotive demand, while ExxonMobil notes increased supply easing price pressures, potentially benefiting consumers across sectors.

"While pressures from wages, reopening costs and demand impacts are expected to persist in Q4, we do expect year-over-year Experiences operating income growth to rebound significantly in the fourth quarter due to fewer comparability or timing factors." --- (DIS, earning call, 2024/Q2)

"But again, the key there is that this is all we're kind of managing this business transition in a way that's really healthy for overall revenue growth as you see with 15% reported revenue growth in the quarter, strong outlook for the year and we're building into a much more kind of durable and healthy foundation for revenue growth going forward across a larger base of paid members and a really kind of strong and scaled highly engaged audience to build into our advertising over time and a strong paid sharing solution and also to kind of penetrate into those households." --- (NFLX, earning call, 2024/Q1)

"These macroeconomic and industry trends have had, and will likely continue to have, an impact on the pricing of, and order rate for our vehicles, and in turn our operating margin." --- (TSLA, sec filing, 2024/Q1)

"This growth in supply helps reduce rising price pressure, easing the impact on consumers and businesses." --- (XOM, AGM, 2024/05/29)

"Revenues - Advertising   Quarter Ended % Change Better (Worse) (in millions) June 29, 2024 July 1, 2023 Domestic $ 672 $ 762 (12) % International 235 243 (3) % $ 907 $ 1,005 (10) % The decline in domestic advertising revenue was due to a decrease of 15% from lower impressions attributable to a decline in average viewership, partially offset by an increase of 1% from higher rates." --- (DIS, sec filing, 2024/Q3)

Impact of Rate Cuts on Credit Availability

Rate cuts are expected to lower deposit pricing, enhancing credit availability, particularly for consumer loans. Despite a high payment rate, banks like Bank of America indicate strong borrowing capacity among consumers. However, tepid commercial loan demand persists, reflecting cautious underwriting amid changing economic conditions.

"with our average deposit cost up 10 basis points in the second quarter after increasing 16 basis points in the first quarter.If the Fed were to start cutting rates later this year, we expect that deposit pricing will begin to decline with the most immediate impact from new promotional rates in our consumer business and standard pricing for commercial deposits where pricing moved faster as rates increased, and we would expect betas to also be higher as rates decline.On Slide 5, we highlight loans and deposits." --- (WFC, earning call, 2024/Q2)

"couple of facts. First, on the payment rates. This is the rate of paydown on balances in a given month remain 20% above index to the pre-pandemic levels, even while our card customers have plenty of capacity to borrow." --- (BAC, earning call, 2024/Q2)

"– a net reduction of $763 million, primarily due to the impact of changes in the loan portfolio and updates to certain macroeconomic variables, predominantly offset by – a net addition of $698 million, including net downgrade activity and the impact of incorporating the First Republic portfolio into the Firm’s modeled credit loss estimates." --- (JPM, sec filing, 2024/Q2)

"The higher interest-rate environment and anticipation of rate cuts continued to result in tepid commercial loan demand, and we have not changed our underwriting standards to chase growth. Balanced growth in our credit card portfolio was more than offset by declines across our other consumer portfolios." --- (WFC, earning call, 2024/Q2)

"And the waterfall shows an estimated impact of those rate cuts to our quarterly NII. The next couple of categories are a result of natural management of interest rate risk in a balance sheet mixed with fixed-rate assets and variable-rate assets." --- (BAC, earning call, 2024/Q2)

Long-Term Effects of Rate Cuts and Inflation on Spending

Long-term effects of Federal Reserve rate cuts and inflation on consumer spending indicate a shift towards more discretionary purchases as inflation stabilizes. Companies like Coca-Cola and McDonald's emphasize maintaining value, while PepsiCo acknowledges the need to return value to consumers after inflationary pressures.

"That's the way we earn the right to take a reasonable level of pricing. Clearly, some of the inflationary effects and some of the mix effects, are likely to become more subdued as we go into the back half of the years. So I'm not expecting, for example in North America, half of it is from mix and half of it is from core pricing." --- (KO, earning call, 2024/Q2)

"Obviously, they're getting hit. I think across their full basket of goods and services by all the inflationary impacts, I think importantly, we've got a really long and strong history of being a leader in both value for money and affordability." --- (MCD, earning call, 2024/Q1)

"As a result, the residual growth rates could be adversely impacted by a sustained deceleration in category growth, grooming habit changes, devaluation of currencies against the U.S. dollar or an increased competitive environment." --- (PG, sec filing, 2024/Q4)

"So, yes, there is some value to be given back to consumers after three or four years of a lot of inflation." --- (PEP, earning call, 2024/Q2)

"As inflation has leveled off, our members are returning to purchasing more discretionary items." --- (COST, earning call, 2024/Q1)

Behavioral Changes in Consumers After Rate Cuts

After Federal Reserve rate cuts, consumers exhibit heightened sensitivity to pricing, favoring value-driven offerings. Walmart emphasizes maintaining lower prices post-promotions, indicating a shift in consumer behavior towards seeking affordability and quality, which aligns with their strategy to enhance customer satisfaction.

"And we know that when we can get that value equation right, great quality, at disruptive prices, that's what really helps the consumer, and that's a role that we're proud to play." --- (WMT, event transcript, 2024/06/07)

"What we really want with rollbacks is to bring a price down and then to work together with the supplier so that we can maintain that price after the rollback finishes, after the 90 day period." --- (WMT, event transcript, 2024/06/07)

Regional Variations in Consumer Spending Patterns

Regional consumer spending patterns are influenced by various factors, including monetary tightening and inflation. Retailers like Home Depot and Walmart report regional corrections, with the West Coast showing early signs. Discretionary spending remains soft as consumers adjust budgets amid ongoing economic pressures.

"So we've heard from some other retailers that maybe West Coast sort of started a correction first, both on the consumer side and your regional performance, how would you describe and are you seeing any of that factor?" --- (HD, conference, 2024/04/04)

"So one question that we are getting from the suppliers that are subscribing to Luminate is help me understand that if I'm seeing this particular purchasing or trends in terms of sales in one particular region, and it could be timely, let's say that it's seasonal candy might be an example." --- (WMT, conference, 2024/09/11)

"I think we're watching consumers continue to digest and adjust to the monetary tightening, which is working its way through the system, and that continues to have an outsized impact on housing where we see affordability challenges and historically low turnover." --- (LOW, earning call, 2025/Q1)

"We saw the consumer in the back half of Q2, I think Ted mentioned, step back a little bit, not only the financing, but a lot going on in the macro and election and so forth. We'll see what happens with rates and so forth and again the election." --- (HD, conference, 2024/09/04)

"So Walmart U. S. Continues to see strong top line results in traffic. However, discretionary has remained relatively soft in recent quarters as consumers manage budgets in the face of multiple quarters of inflationary pressures and our protection is still lapping pandemic buying." --- (WMT, conference, 2024/06/11)

Comparison of Rate Cuts vs. Other Economic Stimuli

Rate cuts are anticipated to influence consumer spending, but skepticism remains regarding their projected effectiveness compared to other economic stimuli. The uncertainty surrounding fiscal and monetary policies, including quantitative easing and tightening, complicates the assessment of rate cuts' true impact on the economy.

"scenario, which is the generally accepted rate cuts of the Fed. But these numbers have always been wrong." --- (JPM, earning call, 2024/Q1)

"So we're continuing to monitor. We still have rate hikes in the or I'm sorry, rate cuts in the near future that we potentially expect. However, we know that it could stay higher for longer." --- (JPM, Investor Day, 2024/05/20)

"So two cuts versus six cuts is the main difference there. But obviously, based on the latest completion data and so on, you could usually get back to a situation with a lot more cuts in the yield curve." --- (JPM, earning call, 2024/Q2)

"So when Volcker raised rates on a Sunday night by 200 basis points, the debt to GDP was 35% and the deficit was 3%. Something drove that inflation." --- (JPM, event transcript, 2024/05/20)

"Once you get there, the beta becomes 80% or something like that. So the uncertainty here is the amount of fiscal stimulus and monetary stimulus is extraordinary. The amount of QE was extraordinary. We don't know the full effect of QT." --- (JPM, conference, 2024/05/29)