Consumer Confidence and the U.S. Midterms

Summary

Podcast Summary: Thoughts on the Market

Episode: Consumer Confidence and the U.S. Midterms

Date: June 25, 2026
Hosts: Ariana Salvatore (U.S. Public Policy Strategist), Mike Zesas (Deputy Global Head of Research)

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Episode Overview

In this episode, Ariana Salvatore and Mike Zesas discuss key factors shaping U.S. consumer confidence as the country approaches the 2026 midterm elections. Drawing from insights at Morgan Stanley’s Captains of the Consumer Industry Conference, the hosts examine the resilience and divergence within consumer segments, the evolving landscape of tariffs and trade policy, energy price uncertainties amid geopolitical developments, and the impact of artificial intelligence on the economic and policy environment.

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Key Discussion Points and Insights

1. Consumer Sentiment and Spending Patterns

• Resilience Amid Headwinds:
  Mike reports that, generally, U.S. consumers have demonstrated surprising resilience, but cracks are forming at the lower-income end.
  • “One pattern that sticks out is rising concern about lower income consumers behavior starting to lag in meaningful way … you’re starting to see substitution and sort of more selectivity amongst lower income households.” — Mike Zesas [00:50]
• Impact of Rising Costs:
  The current squeeze on lower-income consumers is attributed to factors including higher tariffs and gas prices related to Middle East conflict.

2. Trade Policies and Tariffs Outlook

• Current State of Tariffs:
  Ariana clarifies that while certain tariffs remain, especially on steel, aluminum, and specific goods, broader U.S.–Mexico–Canada trade largely enjoys exemptions from the harshest “Section 301” tariffs.
  • “The vast majority of the goods trade between the U.S., Mexico, and Canada is right now not subject to the 301 tariffs.” — Ariana Salvatore [03:09]
• Upcoming Policy Changes:
  There’s nuanced uncertainty around which goods will face new or continued tariffs as temporary authorities expire in July.
  • “The Section 122 authority was a temporary authority. The President is going to have to replace that with a mix of section 232 and 301.” — Ariana Salvatore [03:49]
• Tariff Rate Projection:
  Expect aggregate tariff rates to hover around 8–9% for now, with a possible slight decrease by year’s end.

3. Inflation and Energy Market Dynamics

• Tariffs’ Impact on Inflation:
  Lower or more stable tariffs could help moderate inflation; Michael Gapen, Morgan Stanley’s Chief Economist, projects a “meaningful deceleration in inflation into the end of the year.” — Cited by Mike Zesas [04:14]
• Oil Prices and Geopolitical Developments:
  The recent U.S.–Iran memorandum of understanding (MOU) is helping lower oil and gasoline prices, but there’s significant execution risk.
  • Four key uncertainties:
    1. Execution risk and lack of MOU details (e.g., Strait of Hormuz reopening specifics).
    2. Potential U.S.–Israel divergence regarding the MOU’s objectives.
    3. Congressional pushback, especially from Republicans who may leverage defense appropriations.
    4. Tight timelines for nuclear negotiations (comparing 20 months for JCPOA vs. a 60-day window now).
  • “Implementation … is a big question.” — Ariana Salvatore [05:26]
  • “If you see Republicans push back, that’s going to be an easy forum for them to do so.” — Ariana Salvatore [06:07]
• Overall Outlook:
  Ariana suggests there’s “marginal upside” for markets, but tension and risk remain high until normalization is confirmed.
  • “Our outlook actually expected a normalization of flows by the end of June…with marginal upside, as this is a slightly more constructive outlook.” — Ariana Salvatore [06:55]

4. Artificial Intelligence as a Macro Driver and Policy Factor

• Shift in Industry Conversations:
  While last year’s conference focused on AI’s operational benefits (marketing, efficiency), this year it’s about the macro impact — AI-driven industrial buildout as an economic support.
  • “The acknowledgment of the industrial buildout around this new technology and how that is booing investment and employment and therefore consumption.” — Mike Zesas [08:13]
• Regulatory Uncertainty Ahead:
  Companies are concerned about the possibility that a bipartisan push could emerge to regulate or restrict AI infrastructure, particularly data center construction, potentially impacting the sector’s positive economic contribution.
  • “Are there signs that would show that a tougher regulatory regime, data center construction bans, that these things might take on a bipartisan flavor? And so right now I think that’s a very difficult question to answer.” — Mike Zesas [08:38]
• Elections as a Barometer:
  AI policy is creeping onto the national agenda, mainly emanating from state and local debates, but with potential to become a midterm election theme affecting corporate and investor outlooks.
  • “Efforts there are nascent, but I don’t think they’re going away anytime soon … something that we’re going to watch heading into November because it matters a lot for corporates and for investors alike.” — Ariana Salvatore [09:09]

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Notable Quotes & Memorable Moments

• Consumer Segmentation:
  “You’re starting to see substitution and more selectivity amongst lower income households, a pattern that began a bit last year as a lot of these companies would report, with higher tariffs that seems to have continued with higher gas prices driven by the conflict in the Middle East.”
  — Mike Zesas [00:54]

• Tariff Stability and Slight Downward Drift:
  “What we think is that you’re going to see the tariff rate stay somewhere around 8 to 9% on a headline basis, if not directionally, maybe a little bit lower throughout the course of this year.”
  — Ariana Salvatore [04:11]

• Inflation Deceleration:
  “[That] is contributing to what [he] forecasts as being a meaningful deceleration in inflation into the end of the year, certainly an inflation level lower than what the aggregate Fed forecast is at the moment.”
  — Mike Zesas [04:17], referencing Michael Gapen

• Middle East Execution Risk:
  “So net net, there’s still plenty of execution risk going on, but the trend is at least towards easing of some of these policy pressures …”
  — Mike Zesas [07:08]

• AI Regulatory Anxiety:
  “Are there signs that would show that a tougher regulatory regime, data center construction bans, that these things might take on a bipartisan flavor? And so right now I think that’s a very difficult question to answer.”
  — Mike Zesas [08:38]

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Timestamps for Key Segments

• 00:30: Start of conference observations and discussion of consumer resilience
• 01:51: Deep dive into tariffs, distinctions between USMCA/301/232/122 authorities
• 04:13: Inflation outlook ties into tariff uncertainties, shift to oil and gasoline price discussion
• 05:02: Detailed breakdown of risks to oil supply normalization and MOU with Iran
• 07:08: Transition to AI impact and related policy discussions
• 08:56: National-level AI policy debates and implications for midterm elections

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Conclusion

With the 2026 midterm elections approaching, this episode details how nuanced shifts in trade policy, inflation expectations, energy security, and technological advancement intersect to shape both corporate strategy and broader market sentiment. Mixed but cautious optimism prevails, but the hosts emphasize persistent execution and policy risks—especially on the geopolitical and regulatory fronts—as areas to watch through the rest of the year.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's U.S. public policy strategist.

[B]

And I'm Mike Zesas, Deputy Global head of research.

[A]

Today we'll be discussing the consumer outlook, policy catalysts and what it could mean for the 2026 midterm elections. It's Thursday, June 25th at 9am in New York. So Mike, you're on the road, obviously not in New York City this week. Why don't you tell us a little bit about the conference that you're at and then we can get into some of the topics that have come up in your conversations.

[B]

Yeah, I'm down in South Carolina at Morgan Stanley's Captains of the Consumer Industry Conference where we put together investors and leadership of key consumer companies in the US to learn about each other in a more informal way. Brainstorm and it's been really interesting. Had a lot of meeting with leadership from different prominent consumer companies throughout the US and it's been really fascinating to hear how the consumer's been quite resilient. But in general, one pattern that sticks out is rising concern about lower income consumers behavior starting to lag in meaningful way. Higher income consumers behavior, you're starting to see substitution and sort of more selectivity amongst lower income households, a pattern that began a bit last year as a lot of these companies would report, with higher tariffs that seems to have continued with higher gas prices driven by the conflict in the Middle East. So there's a lot of discussion and concern about how durable it is and in particular if there are some policy choices here that might alleviate some of that pressure and bring some fundamental strength to what is a challenged segment of the consumer market right now.

[A]

Let's talk a little bit more about tariffs. It's our economist's view that we've mostly gotten through the tariff pass through. Is that the sentiment that you're hearing from corporates and the clients that you're talking to? It is.

[B]

Well, it's certainly the hope and I guess the follow up questions here are once some of the temporary tariff authority that was put into place after the Supreme Court struck down the use of iepa, will there be a restoration of those tariff levels and will the USMCA negotiations create higher tariffs? So Arianna, what's your thoughts there? Is there any concern for companies that they're going to start needing to deal with a re escalation of tariff costs relative to what we experienced say last year?

[A]

Yeah, I think to answer that question we need to dig into this under the surface a little bit and understand what types of tariffs that we're talking about. So, to your question on the usmca, we see that largely as a story of continuity. Right. So the USMCA exemption has been in place since the deal was signed. Right. And since Trump imposed those Section 301 tariffs, we think that's likely to stay the case. That means the vast majority of the goods trade between the U.S. mexico, and Canada is right now not subject to the 301 tariffs. Now, on the other hand, we have existing section 232 tariffs in place on not just sectors like steel and aluminum, but a bunch of other goods, too. And we're supposed to get more of those investigations wrapped up in the next week or so. So, on that front, I do think there could be some potential room for escalation. But more broadly speaking, we think the direction of travel is relatively stable, if not slightly lower, because, as you mentioned, the IPA tariffs that were replaced by the section 122s have to get replaced again end of July. Right. So that Section 122 authority was a temporary authority. The President is going to have to replace that with a mix of section 232 and 301. It's been our view that when that happens, there could be some alleviation for very specific pockets of goods that fall into really neither bucket. Right. So they're not necessarily critical for national security, and they're coming from countries that are difficult to maintain a Section 301 investigation on. So it's actually very nuanced under the surface, I would say, in the aggregate level, what we think is that you're going to see the tariff rate stay somewhere around 8 to 9% on a headline basis, if not directionally, maybe a little bit lower throughout the course of this year.

[B]

Got it. And I think that message has been music to the ears of a lot of these companies. And I've been doing these meetings with our chief economist, Michael Gapen, who has said that that's contributing to what he forecasts as being a meaningful deceleration in inflation into the end of the year, certainly an inflation level lower than what the aggregate Fed forecast is at the moment. Another question that comes up is whether or not the recent decrease in oil prices, which should feed through into lower gasoline prices, is durable, if that's something that could be counted on. Because obviously these companies are thinking about it being a potential tailwind to demand going into the second half of the year. How do you think about that, Arianna?

[A]

The MOU that the US And Iran signed, I would say was a welcome development for markets. But that being said, there are a number of paths to re escalation in our view. Really four things to keep an eye on, kind of outstanding questions or uncertainties. The first is on execution risk of the MOU itself. It's very light on details. We need to see more about how exactly the Strait of Hormuz is going to reopen, if there's going to be a servicing fee, a tolling regime, et cetera. That was a red line of the United States. But again, implementation there is a big question. The second is on the calibration or divergence between the US and Israel in terms of their objectives. We identified that early in the conflict as a potential indicator of how long this could possibly last. And I think it's equally as important in assessing how long the ceasefire or the MOU could stay in place. The third thing I would say we need to learn more about is the role of Congress in all of this. So some Republican lawmakers actually pushed back against the mou, saying it didn't go far enough to advance US interests. Now Congress has a more limited role when it comes to the actual MOU implementation itself. Remember the JCPOA, the Iran nuclear deal in 2015 didn't go through Congress either. But Congress can exert some more power come the fall when we start talking about defense appropriations. Right. The Pentagon is asking for $1.5 trillion, 300 billion of that is supplemental war funding. And so I think if you see Republicans push back, that's going to be an easy forum for them to do so. And the last point is on the negotiations themselves. So the mou is a 60 day ceasefire throughout which both parties are supposed to be discussing the nuclear question. Now, looking back at historical context here, the JCPOA took about 20 months to negotiate, start to finish. This is a very compressed timeframe. And again, obviously potential risks for escalation as we see these negotiations go on the next few months. So Mike, I would say, like I said before, markets are definitely seeing this as a welcome development, but that doesn't mean it's without execution risk across the board. Our outlook actually expected a normalization of flows by the end of June. So we're kind of pulling things up by about two weeks. That means that the outlook basically remains intact, but with marginal upside, as this is a slightly more constructive outlook.

[B]

Got it. So net net, there's still plenty of execution risk going on, but the trend is at least towards easing of some of these policy pressures that have been impacting the consumer and it's also been interesting that a lot of the conversations have led to questions about artificial intelligence. Now at this conference last year, a lot of the discussion about artificial intelligence was around how these companies were implementing it to create new marketing opportunities, create efficiencies inside of their operations. This year, a lot of the discussion is actually about the macro trend around artificial intelligence, the acknowledgement of the industrial buildout around this new technology and how that is booing investment and employment and therefore consumption. And so the policy concern or consideration from some of these companies is whether or not there are upcoming electoral issues either in the midterms or in the next election cycle that might change the dynamic around the AI industrial buildout. Are there signs that would show that a tougher regulatory regime, data center construction bans, that these things might take on a bipartisan flavor? And so right now I think that's a very difficult question to answer. There is obviously some level of concern about if policy might change this dynamic around the AI industrial buildout that really it's kind of helped the economy deal with some other external shocks from policy, namely what's going on in the Middle east and trade policy changes before that.

[A]

Yeah, to that point, this question around AI pushback, especially on data center buildout, has been a big theme in the elections thus far. It's really been dealt with on more of a state and local level. But our view is that it's been kind of bubbling up to the national level. Efforts there are nascent, but I don't think they're going away anytime soon. So obviously something that we're going to watch heading into November because it matters a lot for corporates and for investors alike. Mike, maybe we'll leave it there. Thanks so much for taking the time

[B]

to talk and thanks for taking the time to talk to me.

[A]

And 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. The proceeding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.