Projected Impact of Rate Cuts on Consumer Spending in 2025

Historical Impact of Rate Cuts on Consumer Spending

Historical rate cuts have led to mixed consumer spending trends. While some retailers note a shift towards non-discretionary spending due to stretched budgets, others observe consumers waiting for further rate declines before making purchases, indicating a cautious approach influenced by economic conditions.

"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)

"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)

"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)

"Many consumer pocketbooks are still stretched, and we see the effect of that in our business mix, as they're spending more of their paychecks on non-discretionary categories and less on general merchandise." --- (WMT, 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)

Current Consumer Sentiment and Economic Outlook

Current consumer sentiment is cautious, influenced by a deteriorating economic outlook and inflationary pressures. Companies like Starbucks and McDonald's report challenges in customer traffic and confidence, particularly in key markets, indicating a broader trend of discerning consumer spending.

"in a number of key markets, we continue to feel the impact of a more cautious consumer, particularly with our more occasional customer and a deteriorating economic outlook has weighed on customer traffic and impact felt broadly across the industry." --- (SBUX, earning call, 2024/Q2)

"And then in China, I know you mentioned that consumer is less confident. I'm just wondering if you're seeing anything to give you pause on an otherwise aggressive unit growth outlook or maybe a change in strategy, whether you're seeing any US brand pushback or anything along those lines would be helpful. Thank you." --- (MCD, earning call, 2024/Q2)

"Headwinds discussed last quarter have continued in a number of key markets, we continue to feel the impact of a more cautious consumer, particularly with our more occasional customer and a deteriorating economic outlook has weighed on customer" --- (SBUX, earning call, 2024/Q2)

"The Company believes our Strategy builds on our inherent strengths by harnessing the Company's competitive advantages while leveraging its size, scale, agility and the power of the McDonald's brand to adapt and adjust to meet customer demands in varying economic environments, including the current industry-wide challenges associated with more discerning consumer spending." --- (MCD, sec filing, 2024/Q2)

"Starbucks results for the third quarter of fiscal 2024 reflect progress against our action plans to drive traffic to our stores and realized in-store and out-of-store efficiencies, which helped partially offset the impact of continued broader headwinds in a challenging global operating environment, including softening consumer sentiment, a pervasive inflationary environment, and disruptions due to multiple international conflicts." --- (SBUX, sec filing, 2024/Q3)

Sector-Specific Spending Patterns Post-Rate Cuts

Post-rate cuts, sectors like consumer electronics and financial services anticipate varied spending patterns. Apple expects double-digit growth in services, while JPMorgan highlights investor optimism about rate cuts influencing consumer behavior, suggesting a potential increase in spending across multiple sectors.

"We expect our services business to grow double-digits at a rate similar to the growth we reported for the first-half of the fiscal year." --- (AAPL, earning call, 2024/Q2)

"As we think about that $90 billion, if the price rate cuts out totally, does that matter much, given that it seems like June is the only one that would... Jeremy Barnum: Yeah." --- (JPM, earning call, 2024/Q1)

"And the other thing I want to point out, because all of these questions about interest rates and yield curves and NII and credit losses, it's one thing to project it today based on what -- not what we think in economic scenarios, but the generally accepted economic scenario, which is the generally accepted rate cuts of the Fed." --- (JPM, earning call, 2024/Q1)

"Investors are also looking past recent data that showed the U.S. economy remains strong and inflation is sticky and still expect at least two interest rate cuts by year’s end." --- (JPM, press release, 2024/04/12)

"So, it's quite conceivable, and this is actually on the yield curve that we had in the fourth quarter that had six cuts in it, we were still nonetheless expecting an increase in weighted average rate paid as that migration continues." --- (JPM, earning call, 2024/Q1)

Inflation Considerations Affecting Consumer Spending

Inflation remains a critical factor influencing consumer spending. Companies like Costco and Procter & Gamble highlight how inflationary pressures lead to increased pricing, potentially dampening consumption. However, easing inflation may allow for more favorable pricing strategies, as noted by Coca-Cola and Walmart, suggesting a shift in consumer behavior moving forward.

"These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, inflation or deflation, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real" --- (COST, press release, 2024/07/10)

"Increased pricing in response to certain inflationary or cost increases may also offset portions of the cost impacts; however, such price increases may negatively impact product consumption." --- (PG, sec filing, 2024/Q4)

"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)

"It's been great. We talked a little bit in some of the other questions. It's been touched upon, but I wanted to ask about pricing. I know there's been maybe some hesitation more recently from suppliers to negotiate on price just given the inflationary environment seems to be easing." --- (WMT, event transcript, 2024/06/07)

"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/Q1)

Impact of Rate Cuts on Credit Availability

Rate cuts are expected to enhance credit availability by lowering deposit pricing, as indicated by Wells Fargo's anticipation of declining deposit costs. JPMorgan Chase highlights that small changes in pricing strategy can significantly impact credit access, while Goldman Sachs plans to expand its private credit assets, suggesting increased lending opportunities.

"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)

"The uncertainty around interest rates and the economic uncertainties that were expected to impact credit costs for banks caused banks to underperform the broader S and P 500 index for the last couple of years. More recently, we've seen a lift in our share price in" --- (BAC, event transcript, 2024/04/24)

"We have around $900,000,000,000 of low cost consumer and small business deposits and relatively small changes in the pricing strategy could have a big impact on the run rate." --- (JPM, event transcript, 2024/05/20)

"More broadly, we are leveraging our long-standing leadership position in private credit to capitalize on this secular growth opportunity and expect to grow our assets from roughly $130 billion to $300 billion over the next five years." --- (GS, earning call, 2024/Q1)

"In addition, while we've grown our loan book by 9%, our credit costs have been very well managed.We ended 2023 with 23.5 $1,000,000,000,000 in AUCAUA in our security services business, adding over $2,500,000,000,000 in assets on a year over year basis, which represents a 13% increase." --- (C, Investor Day, 2024/06/18)

Consumer Behavior Trends in Response to Rate Cuts

Consumers are likely to respond positively to rate cuts by seeking value and new products, as indicated by retailers like Walmart and Target. Economic conditions will enable businesses to enhance customer experiences, reinforcing low-price shopping behaviors and potentially driving a turnaround in spending trends.

"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)

"So it sounds like your consumers are responding to newness in the box. Just curious how you're feeling about the level of newness innovation for balance of the year." --- (TGT, earning call, 2025/Q1)

"AI has emerged as a linchpin in e-commerce marketing, empowering businesses to glean insights into customer behavior and emerging trends." --- (AMZN, press release, 2024/08/22)

"But then economically, if they're driving a benefit for us as well, it allows us to then invest those funds in areas that also will have benefit for the customer experience that people have become like so like shopping with Walmart is all about everyday low prices and as long as we're reinforcing that behavior with our customers and that position in their mind, then we think we're set up for the future and these businesses are critical to enabling that." --- (WMT, conference, 2024/09/11)

"We expect to see those trends turn around in the second quarter, and that will be a quarter where we return to growth." --- (TGT, earning call, 2025/Q1)