Our Thematics and U.S. Economics analysts Michelle Weaver and
Arunima Sinha discuss how American consumers are planning to
spend as they consider tariffs, inflation and potential new tax
policies.
Read more insights from Morgan Stanley.
----- Transcript -----
Michelle Weaver: Welcome to Thoughts on the
Market. I'm Michelle Weaver, U.S. Thematic and Equity strategist.
Arunima Sinha: And I'm Arunima Sinha from
the Global and U.S. Economics Teams.
Michelle Weaver: Today – an encouraging
update on the U.S. consumer.
It's Tuesday, June 3rd at 10am in New York.
Arunima, the last couple of months have been challenging not only
for global markets, but also for everyday people and for
individual households; and we heard pretty mixed information on
the consumer throughout earning season. Quite a few different
companies highlighted consumers being more choiceful, being more
value oriented. All this to say is we're getting a little bit of
a mixed message.
In your opinion, how healthy is the U.S. consumer right now?
Arunima Sinha: So, Michelle, I'm glad we're
starting with the sort of up upbeat part of the consumer. The
macro data on the consumer has been holding up pretty well so
far. In the first quarter of [20]25, consumer spending has
actually been running at a similar pace as the first quarter of
[20]24. Nominal consumption spending grew 5.5 percent on a
year-on-year basis. Goods were up almost 4 percent. Services were
up more than 6 percent.
So, all of that was good. What our takeaway was that we had a lot
of strength in good spending, and that did probably reflect some
of the pull forward on the back of tariff news. But that pace of
growth suggests that there is an aggregate consumer. They have
healthy balance sheets, and they're willing to spend.
And then what's driving that consumption growth from our point of
view. We think that labor market compensation has been running at
a pretty steady pace so far. So more than 5.5 percent quarterly
analyzed. PCE inflation has been running at just over 3 percent.
And so even though equity markets did see some greater
volatility, they didn't seem to impact the consumer at least in
the first quarter of data. And so, we've had that consumer in a
pretty good shape.
But with all of this in the background, we know, tariffs have
been in the news, and tariff fears have weighed heavily on
consumer sentiment. But then tariff headlines have also become
more positive lately, and consumers might be feeling more
optimistic. What's your data showing?
Michelle Weaver: So that really depends on
what data you're looking at. We saw a pretty big rebound in
consumer sentiment if you look at the Conference
Board survey. But then we saw flat sentiment, when you look
at the University of Michigan survey. These two surveys have some
different questions in them, different subcomponents.
But my favorite way to track consumer sentiment is our own
proprietary consumer survey, which did show a pretty big pickup
in sentiment towards the economy last month. And we saw sentiment
rebound significantly for both conservatives and liberals.
So, this wasn't just a matter of one political party, you know,
having a change of opinion. Both sides did see an improvement in
sentiment. Although consumer sentiment for conservatives improved
off a much higher base. The percent of people reporting being
very concerned about tariffs also fell this month. We saw that
move from 43 percent to 38 percent after the reduction in tariffs
on China. So, people are, you know, concerned a little bit less
there. And that's been a really big thing people are watching.
Arunima Sinha: Feeling better about the
news is great. Are they actually planning to spend more?
Michelle Weaver: So encouragingly we did
also see a big rebound in consumers short term spending outlooks
in the survey. 33 percent of consumers expect to spend more next
month and 17 percent expect to spend less.
So that gives us a net of positive 16 percent. This is in line
with the five-year average level we saw there, and up really
substantially from last month's reading of 5 percent. So, 5
percent to 16 percent. That's a pretty big improvement.
We also saw spending plans rise across all income groups. though
we did see the biggest pickup for higher income consumers and
that figure moved from 12 percent to 31 percent. Additionally, we
saw longer term spending plans – so what people are planning to
spend over the next six months – also improve across all the
categories we look at.
Arunima Sinha: And were there any specific
changes about how the consumers were responding to the tariff
headlines?
Michelle Weaver: Yeah, so people reported
pulling forward some purchases, due to fear of tariff driven
price increases. So, people were planning for this, similarly to
what we saw with companies. They were doing a little bit of
stockpiling. Consumers were doing this as well. So, our survey
showed that over half of people said they accelerated some
purchases over the past month to try and get ahead of potential
tariff related price increases.
And this did skew higher among upper income consumers. The
categories that people cited at the top of the list for pull
forward are non-perishable groceries, household items. So, both
of those things you need in your day-to-day life. And then
clothing and apparel as well, which I thought was interesting.
But that's been one thing that's been in the news a lot that's
heavily manufactured overseas.
So, people were thinking about that. And this does align overall
with our March survey data, where we asked what categories people
were most concerned about seeing price increases. So, their
behavior did line up with what they were concerned about in
March.
Arunima, your turn on tariffs now. The reason tariffs have been
on consumer's minds is because of what they might mean for price
levels and inflation. Throughout earning season, we heard a lot
of companies talking about raising prices to offset the cost of
tariffs. What has this looked like from an economist’s
perspective? Has this actually started to show up in the
inflation data yet?
Arunima Sinha: So not quite yet, and that's
something that, as you might expect, we're tracking very, very
closely. So, one of the things that our team did was to think
about which types of goods or services were going to be impacted
by inflation. And so, we think that that first order effects are
going to be on goods. And we think that the effects could start
to show up in the May data, but we really see that sequential
pace of inflation starting to step up starting June. And then in
our third quarter inflation estimate, we see that number peaking
for the year. So, in the third quarter, we think that core PCE
inflation number is going to be about 4.5 percent Q1-Q analyzed.
Michelle Weaver: And then aside from
tariffs and inflation, how are people going to be affected by a
fiscal policy, specifically the tax bill that just passed the
house?
Arunima Sinha: So, the house version of the
bill has government spending reductions that can be quite
regressive for different cohorts of the consumer. So, we have,
reductions around the Medicaid program, cuts to the SNAP program
as well as possible elimination of the income driven loans
repayment plans. So, all of these would have a pretty adverse
impact on the lower income and the middle-income consumers.
This could be – but will likely not be fully offset by the
removal of taxes, on tips and overtime. And then on the other
side, the higher income consumers could benefit from some of that
increase in SALT caps. But overall, the jury is still out on how
the aggregate consumer will be affected.
Michelle Weaver: So, taking this all into
account, the effects of fiscal policy, of tariff policy, of labor
market income – what's your overall outlook on U.S. consumption
for the rest of the year?
Arunima Sinha: So, we recently published
our mid-year outlook for U.S. economics and our forecast for
consumption spending over 2025 and [20]26 does see the consumer
slowing. And this is really due to three factors. The first is on
the back of those greater tariffs and the uncertainty around them
and the fact that we have slowing net immigration, we're going to
be expecting a slowdown in the labor market. As the pace of
hiring slows, you have a slower growth in labor market income.
And that really is the main driver of aggregate consumption
spending. And then as we talked about, we are expecting that pass
through of higher tariffs into inflation, and that's going to
impact real spending. And then finally the uncertainty around
tariffs, the volatilities and equity markets could weigh on
consumer spending; and may actually push the upper income
cohorts, the big drivers of consumption spending in the economy,
to have higher precautionary savings.
And so, with all of that, we see our nominal consumption spending
growth slowing down to about 3.9 percent by the end of this year.
Michelle Weaver: Well a little unfortunate
to wrap up on a more negative note, but we are seeing, you know,
mixed messages – and some more positive data in the near term, at
least. Arunima, thank you for taking the time to talk.
Arunima Sinha: Thanks so much for having
me, Michelle.
Michelle Weaver: And thank you for
listening. If you enjoy Thoughts on the Market, please leave us a
review wherever you listen to the show and share the podcast with
a friend or colleague today.
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