A prolonged oil disruption is pushing gas prices
higher. Arunima Sinha from our U.S. and Global Economics
team joins Head of U.S. Policy Strategy Ariana Salvatore to
discuss what that means for consumer spending, inflation
expectations and the U.S. midterm elections.
Read more insights from Morgan Stanley.
----- Transcript -----
Arunima Sinha: Welcome to Thoughts on the
Market. I'm Arunima Sinha from Morgan Stanley's U.S. and Global
Economics Teams.
Ariana Salvatore: And I'm Ariana Salvatore, Head
of U.S. Policy Strategy.
Arunima Sinha: Today – what are the implications
of the ongoing oil disruption for the U.S. consumer?
It's Wednesday, March 18th at 10am in New York.
Ariana, let's start with where we are in week three of this
particular oil disruption and what you are thinking about in
terms of what the paths to resolution could look like.
Ariana Salvatore: Yeah. Great place to start.
So, I would say before we get into what the resolution could look
like, we need to think about how long could this conflict
possibly last? And that's the most relevant question for
investors as well. And there I would say there's very little
conviction just because of the uncertainty associated with this
conflict. But I'm keeping my eye on three different things.
The first is a clearer prioritization of the objectives tied to
the conflict. The Trump administration has laid out a number of
different goals for this conflict, some of which are shorter in
nature than others. The second thing I think we're looking at –
that's really important – is traffic at the Strait of Hormuz. And
there, the Trump administration has spoken about insurance, you
know, naval escorts – all of these things that we think will take
some time to really come to fruition. And at the time that we're
recording this, it seems that we're still getting about low
single digit number of tankers through the strait on a daily
basis. So that's the second thing.
The third point I would make is any type of escalation is really
critical here. So, whether it's vertical – meaning different
types of weapons used, different types of targets being hit. Or
horizontal escalation, broadening out into different proxies and,
and more so throughout the region. Those are really important
indicators, and right now all of these things are pointing to a
slightly longer-term conflict than I think most people expected
at the start.
Now, in terms of what that means for markets, for domestic
gasoline prices, all these are really important questions that
I'm sure we're going to get into. But what we should note is that
the president has spoken about a number of policy offsets to
mitigate those price increases, ranging from the Treasury
actually loosening up some of the sanctions on Russia to sell
some oil. You know, we've heard some talk of invoking the Jones
Act waiver. That's a temporary fix.
On net, we think that these policy offsets are not going to
really be enough to mitigate that supply loss that we're getting.
That's a 20 million barrel per day loss. Some of these efforts
mainly will, kind of, target about 7 or 8 million barrels per
day. You're still in a deficit of about 10 to 13 [million]. And
that's really meaningful for markets, for consumption as you well
know, and everything else in between.
Arunima Sinha: That's really helpful
perspective, Ariana. And it's also a useful segue to think about
the note that we jointly put out a few days ago. And just
thinking about what this means for the U.S. consumer. And there,
I think there's the first point to start with is that the
consumer is now going to be living through the third supply shock
in about five years. So, after COVID, after tariffs, here comes
the next. And I think this particular oil shock is going to be
somewhat different from tariffs in the sense that this is going
to hit consumers at the front end and directly. This is not
something that is going to have to pass through business costs.
And some of them could be absorbed by businesses and not fully
passed on to the consumer. So, I think that's an important point.
The second point here is that in terms of the share of spending
of gasoline out of total spend, we are at pretty low numbers.
We're somewhere in the 2 to 3 percent range. So, it could give a
little bit of a cushion. So, the longer-term average can be
somewhere about 4 percent. So, there could be some cushion. But
we know that consumers have already been stretched by, sort of,
several years of high prices.
And so, the way that we thought about what some of the channels
could be for how higher oil prices, which translate into higher
gas prices, could matter for the consumer. I think there are,
sort of, three to identify.
The first one is that it is really just a hit to your real
purchasing power because this is a type of good that is actually
really hard to substitute away from. And you could look through
some of it, at the start. So maybe in the first month you don't
react very much. You pull down on some savings; you take out a
little bit of short-term credit.
But the longer it lasts, the bigger the consumption response is
going to be. And the second channel then to identify is – you
start to build up some precautionary savings motives because
there's this uncertainty that's also lasting for some time. And
what do you pull back on? You'll typically pull back on
discretionary types of spending.
And so, we sized out this impact to say that if oil prices were
to be about 50 percent higher and they last for two to three
quarters, it could hit real personal spending growth by about 40
[basis points] after 12 months. And most of that is really just
coming from the impact on good spending, specifically through
durable goods.
So, there could be some meaningful impact to real consumer
spending in the U.S., if this shock were to go on longer. And the
last point I would just say is, you know, how do inflation
expectations move? Because that's an important point for the Fed
and it's an important point for just people who are thinking
about their spending decisions over the next year or so.
And one interesting thing I think came out in the University of
Michigan survey that came out this Friday; and this was a
preliminary survey. About half of it was conducted before the
conflict started, and half of it was after the conflict started.
And what we saw was that inflation expectations in the year
ahead, so the 12-month-ahead expectations that had been trending
down, paused.
So, they are no longer trending down. And, in its release, the
University of Michigan noted that for the responses that were
collected after the conflict started, inflation expectations did
tick up. And interestingly, the strains were the most for the
bottom income cohort. So, they saw a bigger uptick in inflation
expectations. They actually also saw a bigger uptick in their
unemployment expectations over the next year.
Ariana Salvatore: So, Arunima, if I can ask,
we've been talking a lot about the K-shape economy this year,
right? So, consumption really being led by the upper; let's call
it the upper income cohort. When we think about this translation
to consumption, like you said, more of the stresses on the lower
income side, how do you square that with the economic impact that
you guys are expecting?
Arunima Sinha: The way that I would square it is
the longer it lasts and the greater the, sort of, uncertainty in
asset markets – that might actually begin to weigh on the upper
income consumer as well. So that might make some of those wealth
effects less supportive, than what we have seen, over most of
2025. Just given where consumption has been running in terms of
its pace.
So not only might we see a bigger strain on the lower-income
cohorts as we see this shock lasting longer, we might actually
see some pressures not through the direct spending channel on
gas, but really just, you know, how it's impacting their balance
sheets.
Ariana Salvatore: And that's a really important
point because it also, to me, resonates with the concept of
affordability, which has been a really key political topic for
the past few months, I would say.
And the way we're thinking about this is, like I mentioned, there
are limited policy offsets that can be used to mitigate the
potential increase in domestic gasoline prices. And that matters
a lot for the midterm elections. Typically voters don't really
rank foreign policy as a top issue when it comes to their choice
for candidates – in midterm elections and elections in general.
But once you see that feed through to, you know, inflation, cost
of living, job expectations, that's when it starts to really
matter for people. And what we've been saying, it's not a perfect
rule of thumb, but looking back at the past few elections. If
gasoline prices here in the U.S. are something like $3 a gallon,
that tends to be pretty good for the incumbent party. [$]4 [a
gallon], let's say it's a little bit more politically
challenging. And [$]5 [a gallon], you know, is when you kind of
get into that even more challenging territory for the
administration and for Republicans in Congress.
So again, not a perfect benchmark, but something that we'll be
keeping an eye on too as this conflict evolves.
Arunima Sinha: Ok! So, we'll be keeping an eye
on how that oil disruption plays out and matters for the U.S.
consumer.
Ariana Salvatore: Thanks for listening. If you
enjoy the show, please leave us a review wherever you listen and
share thoughts on the market with a friend or colleague
today.
Important note regarding economic sanctions. This report
references jurisdictions which may be the subject of economic
sanctions. Readers are solely responsible for ensuring that their
investment activities are carried out in compliance with
applicable laws.
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