The Effect of High Interest Rates on Consumer Spending

Impact on Consumer Credit and Borrowing Costs

High interest rates have led to increased funding costs and reduced borrowing capacity (DFS), higher deposit costs (WFC), and a rise in credit card borrowing (BAC). Efforts to maintain affordability include low down payment options (JPM), while delinquency rates have modestly increased (AXP).

"In addition to increased funding costs, deterioration in our credit ratings could reduce our borrowing capacity in the unsecured debt and asset securitization capital markets." --- (DFS, sec filing, 2024/Q1)

"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)

"Increasing our Closing Guarantee to $20,000 is a reflection of our confidence in getting customers into their new home without delay. Affordability and Access to Credit Chase offers low down payment options—as low as 3%—and flexible credit guidelines to create more homeownership opportunities for more people across the income spectrum." --- (JPM, press release, 2024/05/16)

"Consumer growth was driven by credit card borrowing, and while home lending balances were flattish, originations picked up a bit this quarter." --- (BAC, earning call, 2024/Q2)

"Turning now to the accounting of this credit performance on Slide 9. The quarter-over-quarter growth in our loan balances combined with a modest increase in our Card Member loans and receivables delinquency rate resulted in a $148 million reserve build." --- (AXP, earning call, 2024/Q1)

Changes in Consumer Spending Patterns

High interest rates and economic uncertainty are leading consumers to be more cautious, shifting spending towards non-discretionary items and reducing general merchandise purchases. This trend is evident across various sectors, from retail giants like Amazon and Walmart to quick-service restaurants like McDonald's, reflecting a broader industry impact.

"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/Q1)

"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)

"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)

"As consumer spending remains pressured and macro headwinds continue, we are laser-focused on maintaining our competitive advantages and growing QSR market share. With that, I'll turn it over to Ian to talk more about our Q1 results." --- (MCD, earning call, 2024/Q1)

"And even as inflation moderates and we see sequential improvement in discretionary category trends, higher interest rates, uncertainty around the future of the economy, continued social and political divisiveness and the upcoming election cycle have consumers concerned about what lies ahead." --- (TGT, earning call, 2025/Q1)

Sector-Specific Impacts: Retail, Automotive, and Housing

High interest rates have significantly impacted the housing sector, leading to decreased affordability and historically low housing turnover. Companies like Lennar and D.R. Horton are adjusting strategies to meet affordability targets, while Home Depot and Lowe's note the ongoing challenges in housing market strength and consumer adjustments to monetary tightening.

"This is most often the foundation of a very strong housing market. But the chronic supply shortage, the impact of interest rates on affordability as well as persistent and stubborn inflation has moderated housing market strength." --- (LEN, earning call, 2024/Q2)

"And we might be moving to a few more town home communities to try to meet affordability targets for a given sub-market. With regard to pricing increases or price decreases, that's occurring very much week to week at a community level by our operators as they're gauging their market demand, their inventory conditions, and their future lot supply." --- (DHI, earning call, 2024/Q3)

"So if we think about lock-in effect and the impact of housing turnover. Clearly, we've seen two years of significant decrease in housing turnover to the point where we're at really sort of at historical lows." --- (HD, earning call, 2024/Q1)

"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)

"This is most often the foundation of a strong housing market, but the chronic supply shortage, the impact of interest rates on affordability and persistent and stubborn inflation have moderated housing market strength." --- (LEN, sec filing, 2024/Q2)

Effect on Big-Ticket Items and Financing

High interest rates are dampening demand for big-ticket items, with companies like Apple, Tesla, and Best Buy noting reduced consumer spending and a shift towards value deals. Homebuilders like PulteGroup and NVR are seeing financing challenges and increased cancellations, highlighting the broader impact on financing options and consumer behavior.

"And, you know, given you're struggling to reduce your net -- your -- reach your net neutral cash position and your margins are sort of near highs, do you see ways to deploy capital more to spur replacement demand in your installed base either with greater device financing, more investment in marketing, more promotions." --- (AAPL, earning call, 2024/Q2)

"It's on a 30 year fixed deal. It's a heck of a deal. Even buyers that don't use that because their delivery date's kind of out beyond when the commitment can effectively be used, the incentives that we're using are being almost entirely directed towards some sort of financing incentive." --- (PHM, conference, 2024/05/14)

"On the demand front, we've undertaken a variety of initiatives, including lowering the price of both the purchase and subscription options for FSD launching extremely attractive leasing specials for the Model 3 in the U.S. for $299 a month and offering attractive financing options in certain markets." --- (TSLA, earning call, 2024/Q1)

"Our backlog may be impacted by customer cancellations for various reasons that are beyond our control, such as failure to obtain mortgage financing, inability to sell an existing home, job loss, or a variety of other reasons." --- (NVR, sec filing, 2024/Q1)

"This, in combination with the pull-forward of tech purchases into the early years of the pandemic and lower levels of material innovation has led to continued lower demand for higher ticket consumer electronics and a focus on value and deals for current purchasers. We are not changing our original full-year" --- (BBY, earning call, 2025/Q1)

Influence on Consumer Savings and Investment Decisions

High interest rates have led to a 26% decrease in consumer loans and interest receivable balances (PYPL). Financial firms like Charles Schwab manage interest rates to influence client cash balances and loans (SCHW). BlackRock aids in building savings and simplifying investments, even with automated retirement savings adjustments (BLK).

"The consumer loans and interest receivable balance as of March 31, 2024 and 2023 was $4.5 billion and $6.1 billion, respectively, net of participation interest sold, representing a decrease of 26%." --- (PYPL, sec filing, 2024/Q1)

"Because we establish the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on certain margin and bank loans, and control the composition of our investment securities, we have some ability to manage our net interest spread, depending on competitive factors and market conditions." --- (SCHW, sec filing, 2024/Q1)

"is to help more and more people experience financial well-being. As a fiduciary to investors and a leading provider of financial technology, we help millions of people build savings that serve them throughout their lives by making investing easier and more affordable." --- (BLK, press release, 2024/04/18)

"In fact, over the course of Q2, client driven outflows from Bank Sweep, despite the seasonal tax payments, have been less than the cash flow generated from our investment portfolio, which in the absence of any other actions on our part would have led to to continued declines of supplemental borrowing." --- (SCHW, event transcript, 2024/07/16)

"It was a revolutionary, eliminating some of the guesswork for retirement savings by automatically adjusting their investment mix over the time frame." --- (BLK, earning call, 2024/Q1)

Psychological Impact on Consumer Confidence

High interest rates are contributing to consumer pressures and headwinds, impacting confidence and behavior. Companies like Nike and Starbucks are monitoring these macroeconomic conditions, while McDonald's notes that affordability concerns are affecting consumer satisfaction. Overall, economic headwinds are challenging consumer confidence and spending.

"Severe weather conditions, natural disasters, acts of war, terrorism or other hostilities, social unrest or climate change (or expectations about them) can adversely affect consumer behavior and confidence levels, supply availability and costs and local operations in impacted markets, all of which can affect our results and prospects." --- (MCD, sec filing, 2024/Q1)

"We will continue to monitor macroeconomic conditions, including the potential impacts of inflation and higher interest rates on consumer behavior." --- (NKE, sec filing, 2024/Q3)

"Laxman Narasimhan: Thank you, Sharon. I think that if I look at the headwinds that, we see in the market in particularly with the consumer, and the pressures that they face." --- (SBUX, earning call, 2024/Q2)

"And I think if there's any pressure on overall satisfaction or if there's anything that's closing it, it's probably losing some of that relative superiority on affordability." --- (MCD, earning call, 2024/Q1)

"Just more broadly, your confidence, or I guess the prudence in maintaining what still is outsized growth with the headwinds seemingly large." --- (SBUX, earning call, 2024/Q2)

Effect on Different Income Groups

High interest rates are straining lower-income consumers, while higher-income groups show growth in delivery services. Retailers emphasize value across all income ranges, and initiatives like Amazon's RxPass offer savings for fixed-income individuals.

"While our lower income consumers continue to deal with inflation, higher interest rates, and reduced government benefits, we are encouraged that the worst of the SNAP headwinds appear to be behind us." --- (DLTR, earning call, 2024/Q1)

"But again, it was strong on both sides of that point, that $100,000. Ernie Herrman: Lorraine, I would just also jump in on one of the things that we believe is healthy for us, again, as we talked about in the beginning of the way we trade to good, better, best on the age demos, where we have been appealing to more younger customers, it -- what's been great is we also track the age group and the income groups like John is saying, and we are pretty balanced." --- (TJX, earning call, 2025/Q1)

"And in the delivery business where we are stronger with higher income consumer, that's where we've seen a lot of growth." --- (WMT, earning call, 2025/Q1)

"Looking ahead, we expect value to continue to be the most important consideration for customers in multiple income ranges." --- (DG, earning call, 2025/Q1)

"This could save people (many on a fixed income) about $70-$120 per year if they take just one medication, and if all Medicare beneficiaries transitioned their eligible medications to RxPass, Medicare spending could be reduced by nearly $2 billion." --- (AMZN, Twitter, 2024/06/18)

Overall Economic Outlook

High interest rates are leading to a cautious economic environment, with companies like Berkshire Hathaway building cash reserves. Concerns about inflation and its potential global impact are significant, highlighting the dollar's critical role as a reserve currency amidst economic uncertainties.

"That's what I actually thought, one of the strangest things was. He said that he did this because he didn't mind building up the cash hoard at this point because of the environment that's taking place, I guess the economic environment, the stock outlook." --- (BRK.B, event transcript, 2024/05/04)

"And then it won't be the quantity. It'll be whether in any way inflation would get let loose in a way that that really threatened the whole world economic situation and there really isn't any alternative to the dollar as a reserve currency.And you get a lot of people who give you a lot of speeches on that, but that really is the answer." --- (BRK.B, event transcript, 2024/05/04)