Trends and Challenges for Consumers in 2026

Summary

Podcast Summary: Thoughts on the Market – “Trends and Challenges for Consumers in 2026”

Host: Morgan Stanley
Date: December 4, 2025
Episode Theme: Outlook on the K economy, consumer health, and spending trends heading into 2026, with analysis from Morgan Stanley experts during the Global Consumer and Retail Conference in NYC.

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Main Theme and Purpose

This episode examines the evolving health of the US consumer as the economy heads into 2026. Experts from Morgan Stanley discuss macroeconomic factors, the persistent effects of the "K economy" (disparate outcomes by income level), the impact of ongoing inflation, holiday retail performance, and how anticipated changes in Fed policy may influence various consumer segments, particularly the middle and lower income cohorts.

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Key Discussion Points & Insights

1. The State of the Consumer

Contributors: Host (A) and Arunima Masinha, Global and US Economics Team (B)

• Real Spending Trends:
  • Spending growth on a real basis held up through 2025, with Q3 tracking 3% quarter-on-quarter (01:20).
  • This is slower than 2024, when growth was between 3.9–4%.
• Divergence by Income:
  • “For the upper income cohorts those net wealth effects have been very, very supportive. $50 trillion in net wealth that’s been created just over the last three years.” (B, 02:36)
  • Labor market slowdown and inflation are stalling or reducing real wage growth, disproportionately affecting lower and middle income households.
• Forecast for Q4 2025 and Q1 2026:
  • Spending growth expected to slow to about 1% in real terms (versus 3% in previous quarters).
  • Q4 disposable income also anticipated to be weak.

2. The “K Economy” – Expectations for High vs. Low Income Consumers

Contributor: Arunima Masinha (B)

• Potential for Growth Broadening:
  • Modest uptick in consumer growth expected to start in Q2 2026, rising from under 1% to 2% by year’s end (04:18).
  • Growth boost for middle income likely comes from:
    • “Less policy uncertainty, some boost from the fiscal bill, and the fact that monetary policy is heading toward neutral.” (B, 04:48)
  • Upper income segment remains steady, without a forecast for significant acceleration.
  • Diminishing tariff-driven inflation pressures expected after Q1 2026.

3. Holiday Shopping Season and Retail Trends

Contributors: Simeon Gutman, US Hardlines/Broadlines and Food Retail Analyst (C), and Megan Clapp, US Food Producers and Leisure Analyst (D)

• Overall Holiday Sales:
  • “Mixed to maybe slightly a little worse” than expected, especially prior to counting Cyber Monday figures (C, 06:10).
  • Softline retailers could be faring better. Largest companies show relatively stable trends.
  • “One of the ongoing themes across the entire retail landscape has been this big getting bigger... the narrowing funnel of market share.” (C, 06:55)
• Brand and Channel Insights:
  • Companies such as Mattel and Shark Ninja reported “in line” performance for Black Friday, with no downward guidance changes and continued positive replenishment orders (D, 07:54–08:44).
  • “The higher end consumer continues to spend and outperform. Value and innovation continue to be things that consumers are looking for. Online seemed to do better than in stores.” (D, 08:48)
  • Emerging sales channels like TikTok Shop are driving growth for some brands.

4. Federal Reserve Policy & Its Effects on Consumer Recovery

Contributor: Arunima Masinha (B)

• Path to Monetary Neutrality:
  • “We still have the Fed on an easing path into the first half of 2026,” with 75 basis points in additional policy cuts forecast. Monetary policy will move to neutral rather than being outright stimulative (B, 09:25).
• Impact on Key Segments:
  • Interest-sensitive sectors (housing, durables) are expected to benefit most, particularly with mortgage rates possibly dipping below 6%.
  • Middle income families could see some relief in affordability from lower rates, but affordability challenges are likely to persist.

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Notable Quotes and Memorable Moments

• Arunima Masinha on Upper Income Wealth:

  • “For the upper income cohorts those net wealth effects have been very, very supportive. $50 trillion in net wealth that’s been created just over the last three years.” (02:36)

• Simeon Gutman on Retail Market Share:

  • “One of the ongoing themes across the entire retail landscape has been this big getting bigger... the narrowing funnel of market share. So the in-line updates are probably coming from some of the largest companies.” (06:55)

• Megan Clapp on Consumer Segmentation:

  • “The higher end consumer continues to spend and outperform. Value and innovation continue to be things that consumers are looking for. Online seemed to do better than in stores.” (08:48)

• Arunima Masinha on Fed Policy Outlook:

  • “It’s not that monetary policy is becoming easier, it is simply just getting to neutral.” (09:29)

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Timestamps for Important Segments

• State of the Consumer & Spending Growth: 01:20–03:56
• K Economy and Income Cohort Outlooks: 03:56–05:52
• Holiday Retail Insights: 05:52–09:11
• Fed Policy and Future Recovery: 09:11–10:40

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Tone and Style

• The conversation is analytical yet accessible, focusing on data-driven expectations and emergent industry anecdotes.
• Experts use clear, direct language to explain complex market dynamics, with an emphasis on practical implications for different consumer groups.

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Summary

This episode provides a cautious but measured outlook on US consumer trends heading into 2026. While upper income households remain insulated by wealth gains, middle and lower income segments are more exposed to inflation and softening labor markets. Holiday retail is largely “in line” but competitive dynamics favor dominant firms and innovative channels. The expectation is that, with a shift to more neutral monetary policy and less policy uncertainty, consumption growth may broaden in 2026—especially if inflationary and affordability pressures abate.

Best For: Professionals tracking macroeconomic trends, consumer analysts, and anyone watching the evolving impact of policy and market conditions on US household spending.

Transcript

[A]

Welcome to Thoughts on the Market. We're coming to you live from Morgan Stanley's Global Consumer and Retail Conference in New York City where we have more than 120 leading companies in attendance. Today's episode is the first in a two part special focused on the consumer where we'll focus on the K economy and the health of the US Consumer. Tomorrow for the next episode, we'll turn our attention to AI. My colleagues and I are eager to dig into this discussion. With me on stage we have Aruna Masinha from The global and U.S. economics team Simeon Gutman, our U.S. hardlines broadlines and food retail analyst and Megan Clapp, U.S. food producers and leisure analyst. It's Thursday, December 4th at 10:00am in New York. So to start I want to go through the health of the consumer. That's of course been a theme that's been on display at the conference today. And and 2025 has really been a year of mixed signals. But overall spending has held up while inflation has weighed on confidence, especially among lower and middle income households. Arunima, I want to start with you on the macro front. As we head into year end, how would you describe the overall state of the consumer? What are you expecting in terms of real wage growth and spending?

[B]

If we just look at the rearview mirror in terms of Q1 through Q3 this year spending growth on a real basis has been holding up. So in the first half of this year, about 1 1/2% on average for the third quarter. Given the data that we do now have in hand, we're tracking about 3% quarter on quarter on a real basis. But I think it is important to emphasize that this is already a step down than the numbers that we were seeing last year. So in 2024 on these Q on Q numbers, we were running somewhere between 3.94%. So there already has been some slowdown. The recurring theme that we've had this year is how are the drivers of consumption going to weigh on different cohorts? And so how is the labor market going to weigh and how are wealth effects going to play out? And that sort of tied in squarely with the narrative that we've been emphasizing this whole year, which is that that for the upper income cohorts those net wealth effects have been very, very supportive. $50 trillion in net wealth that's been created just over the last three years and that's continued for this year as well. And so meanwhile the labor market has downshifted and that's had a read through into both just nominal wage growth as well as real wage growth. So for example, on a three month, three month basis, that real wage growth after we've adj for the nominal for inflation has slowed down essentially to stall speed. It used to run somewhere between 2, 2 and a half percent in the first part of this year. And that we think is going to have a read through as we go into this upcoming quarter of Q4 as well as in the first quarter of next year. So just this lagged effect from the slowdown in labor market income is going to weigh kind of continue to weigh on the middle income and sort of the upper, lower part of the income cohort. So in terms of our growth forecasts for spending over this quarter in Q4 and over next quarter in Q1, we are expecting about 1% real growth for consumption. That is a 2 percentage point step down from where we were in, in Q3. And then just in terms of disposable income, we're also thinking this particular quarter in Q4 is going to be fairly weak.

[A]

You spoke a little bit about the different income cohorts there, but I want to double click on that. The K economy has been a really persistent theme as higher income households have benefited from strong market returns, but higher price levels have weighed on lower income households. What are your expectations for the high versus low income consumer next year?

[B]

So next year we do think that there could be some broadening out in consumption growth. Just overall we have a sequential step up in growth that begins to take place starting in 2Q26. So we have consumption growth that starts to slowly inch up from about just under 1% in 1Q26 all the way up to about 2% by the end of the year. What that's going to be driven by. We think that there are going to be some lessening of pressures on the middle income cohorts. And where is that going to come from? It's going to come from perhaps a still moderate labor market. So we're not, we don't think we're going to be seeing these big 100, 150,000 plus jobs being added every month. We're thinking maybe about 60,000 on average per month for most of next year, but just less policy uncertainty, some boost from the fiscal bill. The fact that monetary policy is going to be heading towards neutral. All of those things should be supportive given that the upper income didn't really support slow down this year. We also don't think there's going to be a giant acceleration next year. And so some of that uptick in consumption growth we think could actually come from the middle income. And we also think that some of those tariff pressures on inflation are going to start to dissipate after peaking in the first quarter next year.

[A]

And Simeon, I want to bring the company side into the conversation. What's the early read you've gotten on Black Friday? Expectations into the shopping season were pretty weak. Do you think things could turn out to be better than feared? And are you seeing any differences by income cohort there?

[C]

The overall take is it's mixed to maybe slightly a little worse. I'll answer it in a few different ways. First, the old fashioned tire kicking that the retail analysts have done during the holiday season in our hardline broadline food retail space mixed to slightly a little worse in Alex Straiten's softline world sounded a little bit better. And then if we combine the takeaways that we've had from companies at least who presented yesterday, Walmart, Target and some other category killer retailers sounded about in line. Underlying trends relatively stable. I sat on a panel earlier today with a data aggregator who suggested that the holiday was a little underwhelming. What we don't see and the underwhelming being at a minus 2% run rate for the I guess the November to date period that doesn't include Cyber Monday. What this doesn't account for is the market share shifts. So one of the ongoing themes across the entire retail landscape has been this big getting bigger. We say it a lot, but the narrowing funnel of market share. So the inline updates are probably coming from some of the largest companies. Even if the overall holiday was a little underwhelming, now in line is not anything to write home about. It's harder to get to an in line holiday if you started out below. So in line's okay, but not gangbusters. That's probably the right way to characterize it.

[A]

Megan, same question to you. How is holiday shopping tracking in your space? Have you learned anything surprising about holiday during the conference?

[D]

Yeah, I would agree with Simeon. Relatively in line. I'd say kind of so far so good is what we heard from companies at the conference. We had both Mattel and Sharkninja product companies that sell into many of the larger retailers that are winning that. Simeon talked about holiday matters a lot for both of them. So we're still many weeks ahead of us in terms of pos. But but Mattel talked about positive POS continuing through the Black Friday season. They left their guidance unchanged. Today they're seeing replenishment from the retailers and orders in line with expectations, which was a question just given some of the uncertainty in the landscape. Shark Ninja sells small appliances. They spoke to a strong Black Friday again seeing the fourth quarter and holiday play out in line with their expectations. Maybe a couple themes that stood out and one of them was particularly interesting to me. You talked about the K economy. I think it was very clear. The higher end consumer continues to spend and outperform. Value and innovation continue to be things that consumers are looking for online seem to do better than in stores. That's what we heard from a lot of companies coming out of last week. And then newer channels like TikTok Shop are coming into the mix and brands are seeing strong growth from those channels as well.

[A]

MM and Arunama, I want to wrap this section on Fed policy. How do you expect fed policy in 2026 to influence consumer spending and recovery, especially for those middle and lower income households?

[B]

We still have the Fed on an easing path into 20 in the first half of 2026, so we think 75 basis points in additional policy cuts into next year. But that more or less just takes monetary policy to some estimate of neutral. So the point is that it's not monetary policy is becoming easier, it is simply just getting to neutral. And so if we think about the most interest sensitive types of consumption, it's going to come from housing and it's going to come from durables. And what our housing strategists are thinking is that given this front end of the curve, our 10 year forecast for the middle of next year is still at about 3.75 and so mortgage rates could dip below 6%. So it's not the front end of the curve. It is that belly of the curve there that's important there. And so there could be some pickup in housing. That's going to be important I think for the middle income consumer for affordability. We think it's still going to be an important concern for housing, but perhaps the middle income could benefit from some of those lower mortgage rates that are going to come in.

[A]

Arunima, Simeon and Megan, thanks for all your insights and to our live and podcast audiences. Thanks 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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