Affordability is back in focus in D.C. after the brief U.S.
shutdown. Our Deputy Global Head of Research Michael Zezas and
Head of Public Policy Research Ariana Salvatore look at some
proposals in play.
Read more insights from Morgan Stanley.
----- Transcript -----
Michael Zezas: Welcome to Thoughts on the
Market. I'm Michael Zezas, Deputy Global Head of Research for
Morgan Stanley.
Ariana Salvatore: And I'm Ariana Salvatore,
Head of Public Policy Research.
Michael Zezas: Today we're discussing the
continued focus on affordability, and how to parse signals from
the noise on different policy proposals coming out of D.C.
It's Wednesday, February 4th at 10am in New York.
Ariana Salvatore: President Trump signed a
bill yesterday, ending the partial government shutdown that had
been in place for the past few days. But affordability is
still in focus. It's something that our clients have been
asking about a lot. And we might hear more news when the
president delivers his State of the Union address on February
24th and possibly delivers his budget proposal, which should be
around the same time.
So, needless to say, it's still a topic that investors have been
asking us about and one that we think warrants a little bit more
scrutiny.
Michael Zezas: But maybe before we get into
how to think about these affordability policies, we should hit on
what we're seeing as the real pressure points in the debate.
Ariana, you recently did some work with our economists. What were
some of your findings?
Ariana Salvatore: So, Heather Berger and
the rest of our U.S. econ[omics] team highlighted three groups in
particular that are feeling more of the affordability crunch, so
to speak. That's lower income consumers, younger consumers, and
renters or recent home buyers.
Lower income households have experienced persistently higher
inflation and more recently weaker wage growth. Younger consumers
were hit hardest when inflation peaked and are more exposed to
higher borrowing costs. And lastly, renters and recent buyers are
dealing with much higher shelter burdens that aren't fully
captured in standard inflation metrics.
Now, the reason I laid all that out is because these are also the
cohorts where the president's approval ratings have seen the
largest declines.
Michael Zezas: Right. And so, it makes
sense that those are the groups where the administration might be
targeting some of these affordability initiatives.
Ariana Salvatore: That's right. But that's
not the only variable that they're solving for. Broadly speaking,
we think that the president and Republicans in Congress really
need to solve for four things when it comes to affordability
policies.
First, targeting these quote right cohorts, which are those, as
we mentioned, that have either moved furthest away from the
president politically, or have been the most under pressure.
Second feasibility, right? So even if Republicans can agree on
certain policies, getting them procedurally through Congress can
still be a challenge. Third timing – just because the legislative
calendar is so tight ahead of the November elections. And fourth
speed of disbursement. So basically, how long it would take these
policies to translate to an uplift for consumers ahead of the
elections.
Michael Zezas: So, thinking through each of
these constraints, starting with how easy it might be to actually
get some of these policies done, most of the policies that are
being proposed on the housing side require congressional
approval. In terms of these cohorts, it seems like these policies
are most likely to focus on – that seems aimed at lower-income
and younger voters. And in terms of timing, we know the
legislative calendar is tight ahead of the midterms, and the
policy makers want to pursue things that can be enacted quickly
and show up for voters as soon as possible.
Ariana Salvatore: So, using that lens, we
think the most realistic near-term tools are probably mostly
executive actions. Think agency directives and potential changes
to tariff policy. If we do see a second reconciliation bill
emerge, it will probably move more slowly but likely cover some
of those housing related tax credit changes.
But of course, not all these policies would move the needle in
the same way. What do we think matters most from a macro
perspective?
Michael Zezas: So, what our economists have
argued is that the affordability policies being discussed – tax
credits subsidies, payment pauses – they could be meaningful at a
micro level for targeted households, but for the most part, they
don't materially change the macro outlook. The exception might be
tariffs; that probably has the broadest and most sustained impact
on affordability because it directly affects inflation. Lower
tariffs would narrow inflation differentials across cohorts,
support real income growth and make it easier for the Fed to cut
rates.
Ariana Salvatore: Right. And just to add a
finer point on that, I think directionally speaking, this is
where we've seen the administration moving in recent months.
Remember, towards the end of last year, the Trump administration
placed an exemption on a lot of agricultural imports. And just
the other day, we heard news that the trade deal with India was
finalized reducing the overall tariff rate to 18 percent from
about 50 percent prior.
Michael Zezas: Okay. So, putting it all
together for what investors need to know. We see three key
takeaways. First, even absent new policy, our economists expect
some improvement in affordability this year as inflation
decelerates and rate cuts come into view. And specifically, when
we talk about improvements in affordability, what our economists
are referring to is income growth consistently outpacing
inflation, lowering required monthly payments.
Second, most proposed affordability policies are unlikely to
generate the meaningful macro growth impulse, so investors
shouldn't overreact to headline announcements. And third, the
cohort divergence matters for equities. Pressure on lower income
in younger consumers helps explain why parts of consumer
discretionary have lagged. While higher income exposed segments
have remained more resilient.
So, if inflation continues to cool, especially via tariff relief,
that's what would broaden the consumer recovery and potentially
create better returns for some of the sectors in the equity
markets that have underperformed.
Ariana Salvatore: Right, and from the
policy side, I would say this probably isn't the last time we'll
be talking about affordability. It's politically salient. The
policy responses are likely targeted and incremental, and this
should continue to remain a top focus for voters heading into
November.
Michael Zezas: Well, Ariana, thanks for
taking the time to talk.
Ariana Salvatore: Great speaking with you,
Mike.
Michael Zezas: And as a reminder, if you
enjoy Thoughts on the Market, please take a moment to rate and
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