Podcast Summary: "U.S. Shoppers Take Stock"

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
• Episode: U.S. Shoppers Take Stock
• Release Date: June 3, 2025

Introduction

In the June 3, 2025 episode of Thoughts on the Market, Morgan Stanley's Michelle Weaver and Aruna Masinha delve into the current state of the U.S. consumer. Amidst a backdrop of global market challenges and mixed signals from recent earnings seasons, the discussion centers on consumer health, sentiment, spending behaviors, and the impacts of tariffs and fiscal policies.

Current Health of the U.S. Consumer

Michelle Weaver initiates the conversation by acknowledging the recent tumult in global markets and the varied feedback from the consumer side during earnings seasons. She notes that while some companies report consumers becoming more discerning and value-oriented, the overall message remains mixed.

Quote:
“A encouraging update on the U.S. consumer. It's Tuesday, June 3rd at 10:00am in New York.”
— Michelle Weaver [00:01]

Aruna Masinha responds by highlighting positive macroeconomic data, emphasizing that consumer spending in Q1 2025 maintained a robust pace, mirroring Q1 2024. Nominal consumption grew by 5.5% year-over-year, with goods up nearly 4% and services over 6%.

Quote:
“Consumer spending has actually been running at a similar pace... nominal consumption spending grew 5.5% on a year-on-year basis.”
— Aruna Masinha [00:45]

He attributes this strength to healthy consumer balance sheets and steady labor market compensation, noting that PCE inflation remained just above 3%, indicating that market volatility hadn't adversely affected consumers in the first quarter.

Consumer Sentiment Analysis

Michelle Weaver discusses varying consumer sentiment indicators. While the Conference Board survey shows a significant rebound in sentiment, the University of Michigan survey indicates flat sentiment. She prefers Morgan Stanley's proprietary survey, which reveals a substantial pickup in economic sentiment last month across both conservatives and liberals.

Quote:
“Our own proprietary consumer survey, which did show a pretty big pickup in sentiment towards the economy last month.”
— Michelle Weaver [02:19]

She further notes a decrease in concern over tariffs, dropping from 43% to 38% following reductions in tariffs on China, suggesting growing consumer optimism.

Consumer Spending Outlook

The discussion shifts to future spending intentions. Weaver presents optimistic data showing that 33% of consumers plan to increase spending next month, a significant rise from the previous month's 5%. This improvement spans all income groups, with higher income consumers showing the most considerable increase from 12% to 31%.

Quote:
“We saw all income groups though we did see the biggest pickup for higher income consumers and that figure moved from 12% to 31%.”
— Michelle Weaver [03:24]

Additionally, long-term spending plans over the next six months have also improved across various categories.

Impact of Tariffs on Consumer Behavior

Addressing the influence of tariffs, Weaver explains that consumers have been accelerating purchases to preempt potential price hikes. Over half of surveyed individuals have pulled forward purchases, particularly in non-perishable groceries, household items, and clothing.

Quote:
“Over half of people said they accelerated some purchases over the past month to try and get ahead of potential tariff related price increases.”
— Michelle Weaver [04:18]

This behavior aligns with earlier concerns about price increases in March, indicating that consumer actions are reflective of their apprehensions regarding tariffs.

Tariffs, Inflation, and Economic Implications

Aruna Masinha evaluates the relationship between tariffs and inflation. He notes that while tariffs are expected to influence inflation, the effects haven't fully materialized yet. The initial impact is anticipated in May, with a more noticeable uptick in inflation rates starting June. By the third quarter, core PCE inflation is projected to peak at around 4.5%.

Quote:
“We really see that sequential pace of inflation starting to step up starting June.”
— Aruna Masinha [05:37]

Fiscal Policy and Its Effects on Consumers

The conversation transitions to recent fiscal policies, particularly the newly passed House tax bill. Masinha highlights that while certain measures like the removal of taxes on TIPS and overtime may benefit higher-income consumers, reductions in government spending—such as cuts to Medicaid and SNAP programs—are likely to adversely affect lower and middle-income households.

Quote:
“The House version of the bill has government spending reductions that can be quite regressive for different cohorts of the consumer.”
— Aruna Masinha [06:30]

He emphasizes that the overall impact on the aggregate consumer remains uncertain, as the benefits for some may be offset by the detriments to others.

Overall Outlook on U.S. Consumption

When asked about the broader outlook for U.S. consumption, Masinha presents a cautious forecast. Despite current strengths, he anticipates a slowdown in consumption growth due to several factors:

1. Increased Tariffs and Uncertainty: Leading to cautious consumer behavior.
2. Slowing Labor Market: Predicting reduced income growth as hiring pace decelerates.
3. Inflation Pressure: Higher tariffs potentially feeding into real spending costs.
4. Equity Market Volatility: Influencing higher-income consumers to opt for precautionary savings.

Quote:
“So we see our nominal consumption spending growth slowing down to about 3.9% by the end of this year.”
— Aruna Masinha [07:28]

Conclusion

The episode concludes on a nuanced note, acknowledging both the immediate positive signs in consumer sentiment and spending plans, while also highlighting potential headwinds from tariffs, fiscal policy changes, and economic uncertainties that may dampen consumption growth later in the year.

Final Remarks:
Weaver expresses slight disappointment in ending on a more negative projection but maintains optimism due to the current positive data trends. Both hosts thank each other and the listeners, emphasizing the informational nature of the discussion.

Quote:
“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.”
— Michelle Weaver [08:40]

Key Takeaways:

• Current Consumer Health: Robust spending in Q1 with steady income and manageable inflation.
• Sentiment Variability: Mixed signals from different surveys, but proprietary data shows improvement.
• Spending Plans: Significant increase in short-term and long-term spending intentions, especially among higher-income groups.
• Tariff Impact: Consumers are preemptively purchasing to avoid potential price hikes; ongoing watch on inflation effects.
• Fiscal Policies: Potential regressive impacts from government spending cuts; overall effect remains uncertain.
• Future Outlook: Anticipated slowdown in consumption growth due to economic pressures and policy uncertainties.

This comprehensive analysis offers valuable insights into the current and future state of U.S. consumer behavior, providing stakeholders with a nuanced understanding of the factors influencing market dynamics.