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Tight monetary policy has cooled the economy and inflation has moderated

Summary: The Fed's rate cut is allowing us to look at the economic data from a slightly more rosy perspective. Tight monetary policy has cooled the economy and inflation has moderated. But wage growth is still outpacing inflation and that could give consumers an extra boost over time. Costco said that as inflation has moderated it's seeing consumers spend on more non-food categories.

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Macro

Lower rates should boost confidence
"With the Federal Reserve lowering interest rates by 50 basis points last week, we believe this will further benefit consumer confidence and affordability... Ultimately, lower mortgage rates do help to stimulate demand, and we saw evidence of this in August, with net orders increasing sequentially week by week, as the month progressed...As rates moderated in August, our net orders improved." - KB Home (KBH 0.00%↑) COO Robert McGibney

Tight monetary policy has cooled the economy
"Certainly, tight monetary policy has contributed to cool off aggregate demand and slow the economy. It has done so in large part by slowing spending on interest-sensitive expenditures, such as housing, as well as autos and other durable goods. Other spending typically financed with credit, such as business equipment, has also been slower." - Federal Reserve Governor Adriana Kugler

Inflation has moderated
"If you look at the macro picture, U.S. GDP grew following the pandemic fueled by inflation, and that inflation appears to be stabilizing, and the outlook for GDP growth remains healthy, providing more certainty." - SouthWest Airlines (LUV 0.00%↑) CEO Robert Jordan

“Inflation was once again effectively flat in the quarter across all core merchandise. Food and sundries and fresh foods were slightly inflationary and this was offset by deflation in non-foods” - Costco (COST 0.00%↑) CFO Gary Millerchip

But could pick up some next year
"We have seen pricing remain relatively flat as inflation has cooled for goods in our industry. We expect to see slightly more inflation next year, and our assumption is like-for-like SKU retail inflation will be in the low-single-digits in FY '25." - AutoZone (AZO 0.00%↑) CEO Phil Daniele

It's a two-speed economy for low vs. high-income consumers
"If you look at the economy just in general, I've said this for a while that you've had this sort of this two-speed world where the middle- and upper-income consumers have strong balance sheets and are continuing to spend as normal, and the lower-end is feeling the pinch, particularly in the discretionary categories." - AutoZone (AZO 0.00%↑) CFO Jamere Jackson

Wage growth is outpacing inflation
"What encourages us about the consumer is that even in this environment, you've got unemployment at 4.2%, you've got wage growth at 4%, so wage growth is finally keeping up or outpacing inflation. So, we feel pretty good that as consumer sentiment improves, moving forward, that you'll see some return of normalcy in terms of spending and our business will benefit from that." - AutoZone (AZO 0.00%↑) CFO Jamere Jackson

This could lead to progressive improvement
"I think we will sequentially improve from here. Again, like we've talked about on the last couple of calls, I think it's a progressive improvement. I don't think it's going to be a snapback. If you look at the environment out there, the consumer is still pressured and we think that's showing up on both DIY and the commercial side of the business." - AutoZone (AZO 0.00%↑) CEO Phil Daniele

But it may take time for consumers to feel back to normal
"It is important to remember that households and businesses are still dealing with prices for many goods and services that are significantly higher than a couple of years ago. Prices for groceries, for example, are about 20 percent higher than before inflation started rising in 2021, and while earnings have been rising faster than inflation, it may take some time for it to feel as though prices are back to normal." - Federal Reserve Governor Adriana Kugler

The Fed is now focused on labor markets
"While our focus should remain on continuing to bring inflation to 2 percent, we should now also shift attention to the maximum-employment side of the FOMC's dual mandate. The labor market remains resilient, but the FOMC now needs to balance its focus so we can continue making progress on disinflation while avoiding unnecessary pain and weakness in the economy as disinflation continues in the right trajectory. I strongly supported last week's decision and, if progress on inflation continues as I expect, I will support additional cuts in the federal funds rate going forward." - Federal Reserve Governor Adriana Kugler

International