News built for finance pros
CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.
When someone as bombastic and self-congratulatory as Elon Musk says he’s “worried” about something, maybe you take note.
The worry in question: high interest rates. For once, Musk’s concern is relatable: Around 40% of CFOs said their companies are cutting back on spending because of high interest rates, according to the latest CFO Survey, a measure of CFO sentiment from the Richmond and Atlanta Federal Reserve Banks and Duke University.
And in the latest batch of earnings, we’ve seen this cautionary outlook play out in real time, starting with Musk’s Tesla.
During Tesla's Q3 earnings call last week, as Musk discussed the company’s plans for building a “Gigafactory” in Mexico, he said Tesla wants to “get a sense for what the global economy is like before we go full tilt on the Mexico factory.”
“I’m worried about the high interest rate environment that we’re in,” he continued. “I just can’t emphasize this enough that the vast majority of people buying a car is about the monthly payment. And as interest rates rise, the proportion of that monthly payment that is interest increases naturally.”
In total, Musk mentioned interest rates 19 times throughout the call.
And it’s clear that challenges in the global economy are enough to sway business decisions: “If you can tell me what the interest rates are, I can tell you when we should build the factory,” Musk said at one point.
While recent big bank earnings showed a clear boost from the interest rate environment, the story in other earnings reports justifies Musk’s worries.
For example, Kris Johnston, CFO of Vintage Wine Estates, a group of wineries, noted that its “largest declines were in e-commerce sales and lower sales to a major television retailer, which was redirecting programming to address changing consumer spending patterns as interest rates ramped.”
Meanwhile, the CEO of swimming pool distributor Pool Corporation, Peter Arvan, said that rising interest rates have put a damper on new pool construction, particularly for entry level pools.
“For the previous couple of years, when interest rates were very low, a pool could be had for $750 a month to $800 a month and homeowners were signing deals based on that as their monthly payment,” Arvan said.
The “significant increase in interest rates” has driven up the borrowing cost and availability “of those funds to build a swimming pool,” ultimately taking “a chunk out of the lower end pools,” he explained.