How Rate Cuts Could Impact US Consumer Spending

Right now, the US Federal Reserve is widely expected to cut interest rates in response to cooling inflation and an uptick in unemployment. When a cut comes—which could be as soon as this week—it will be the first interest cut since 2020.

So how could future rate cuts impact consumer confidence and spending?

The So What

Although it would take time for the impact of lower interest rates to flow through the economy, they could further strengthen confidence among US households that inflation will continue to cool and that the future is looking bright.

BCG research suggests that consumer confidence is already slowly recovering in the US and elsewhere around the world.

“What we’re seeing is that people are still feeling squeezed, but they are also starting to see things improving in their personal finances,” says Lauren Taylor, a BCG managing director and partner who leads the firm’s Center for Customer Insight (CCI).

“If this trend continues, we believe sentiment will remain on an upward trajectory.”

The degree to which greater consumer confidence translates into higher spending, however, will vary by product category and market, according to a recent survey by BCG’s Center for Customer Insight (CCI). 

Among the key findings:

• The share of respondents expressing personal finance concerns has dropped from 39% to 26% over the past year.
• US consumers’ financial circumstances and outlooks influence which categories of goods and services they are prioritizing for higher spending.
• Pessimism over the economy and personal finances remains high, and more than one-third of US consumers reported significant hardships over the previous six months due to rising costs.

Now What

BCG research indicates that rising consumer sentiment, on its own, won’t immediately lift all boats. “Companies need to be knowledgeable about sentiment and how it is trending,” Taylor says, “but they also need to understand the specific needs and context that influence purchasing decisions.”

Differentiate by product category and customer segment. Lower interest rates would impact sales in some categories sooner than others, in different ways, and vary by market segment. BCG’s surveys of consumers around the world indicate that insurance and leisure travel are particularly good businesses to be in right now. Lower rates and improved sentiment could also be good news for automakers; many consumers take out car loans and may believe they’ll be able to afford a new vehicle.

Consumers’ sentiments and needs influence their spending priorities.

• Respondents who report feeling good about their finances most often said they expect to spend relatively more on cars, insurance, and luxury goods.
• Pessimists list mobile technologies and services, apparel, and skin care among their priorities.
• Sales in dining and snack businesses—categories in which the majority of both optimists and pessimists say they plan to reduce spending---are likely to remain challenged.

Value and price will remain important considerations. Among the 42% of US consumers who reported increasing their spending over the previous six months, nearly two-thirds attributed that to having to pay higher prices—rather than the desire to consume more.

With inflation cooling, consumers could grow less tolerant of price hikes—or expect them to start falling. Many companies are not ready to slash prices. But brands with smart pricing and that emphasize the value that customers are paying for could create opportunities, especially in categories where consumers have been cutting back due to financial pressures.

Pay attention to other drivers of consumer choice. Even if more consumers are in the market for a particular product, brands still must figure out how to motivate them to make a purchase. Likewise, certain consumers may be persuaded to make purchases in “low priority” categories if a particular product is seen as meeting a need under the circumstances.

One-size-fits-all marketing strategies are unlikely to work. Companies need approaches that take into account the many different drivers of consumer choice for different segments of the market. When deciding to purchase a car, for example, BCG research shows that needs for safety, comfort, or performance may be bigger considerations than the price. Choices of restaurants, beverages, and snacks are driven by needs that vary by the occasion.

Companies with a keen understanding of consumer mindsets in different segments can have a big competitive advantage in today’s shifting, complex environment.