U.S. Shoppers Take Stock

Summary

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

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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.

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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.

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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.

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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.

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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.

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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]

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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.

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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]

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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]

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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.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Michelle Weaver, US Thematic and Equity Strategist.

[B]

And I'm Aruna Masinha. From the global and U.S. economics teams.

[A]

Today, an encouraging update on the U.S. consumer. It's Tuesday, June 3rd at 10:00am in New York. Arunima the last couple of months have been challenging, not only for global markets, but also for everyday people and for individual households. And we heard pretty mixed information on the consumer throughout earnings season. Quite a few different companies highlighted consumers being more choiceful, being more value oriented. All this to say is we're getting a little bit of a mixed message. In your opinion, how healthy is the US Consumer right now?

[B]

So, Michelle, I'm glad we're starting with the sort of upbeat part of the consumer. The macro data on the consumer has been holding out pretty well so far. In 1Q25, consumer spending has actually been running at a similar pace. And as 1Q24, nominal consumption spending grew 5.5% on a year on year basis, goods were up almost 4%. Services were up more than 6%. So all of that was good. What our takeaway was that we had a lot of strength in good spending and that did probably reflect some of the pull forward on the back of tariff news. But that pace of growth suggests that there is an aggregate consumer. They have healthy balance sheets and they're willing to spend. And then what's driving that consumption growth? From our point of view, we think that labor market compensation has been running at a pretty steady pace so far. So more than 5.5% quarterly analyzed PCE inflation has been running at just over 3%. And so even though equity markets did see some greater volatility, they didn't seem to impact the consumer at least in the first quarter of data. And so we've had that consumer in a pretty good shape. But with all of this in the background, we know tariffs have been in the news and tariff fears have weighed heavily on consumer sentiment. But then tariff headlines have also become more positive lately and consumers might be feeling more optimistic. What's your data showing?

[A]

So that really depends on what data you're looking at. We saw a pretty big rebound in consumer sentiment if you look at the Conference Board survey. But then we saw flat sentiment when you look at the University of Michigan survey. These two surveys have some different questions in them, different subcomponents. But my favorite way to track consumer sentiment is our own proprietary consumer survey, which did show a pretty big pickup in sentiment towards the economy last month. And we saw sentiment rebound Significantly for both conservatives and liberals. So this wasn't just a matter of one political party having a change of opinion. Both sides did see an improvement in sentiment, although consumer sentiment for conservatives improved off a much higher base. The percent of people reporting being very concerned about tariffs also fell this month. We saw that move from 43% to 38% after the reduction in tariffs on China. So people are concerned a little bit less there and that's been a really big thing. People are watching.

[B]

Feeling better about the news is great. Are they actually planning to spend more?

[A]

So encouragingly, we did also see a big rebound in consumers short term spending outlooks. In the survey. 33% of consumers expect to spend more next month and 17% expect to spend less. So that gives us a net of positive 16%. This is in line with the five year average level we saw there and up really substantially from last month's reading of 5%. So 5% to 16%. That's a pretty big improvement. We also saw spending plans rise across all income groups though we did see the biggest pickup for higher income consumers and that figure moved from 12% to 31%. Additionally we saw longer term spending plans. So what people are planning to spend over the next six months also improve across all the categories we look at.

[B]

And were there any specific changes about how the consumers were responding to the tariff headlines?

[A]

Yeah, so people reported pulling forward some purchases due to fear of tariff driven price increases. So people were planning for this similarly to what we saw with companies. They were doing a little bit of stockpiling. Consumers were doing this as well. So our survey showed that over half of people said they accelerated some purchases over the past month to try and get ahead of potential tariff related price increases. And this did skew higher among upper income consumers. The categories that people cited at the top of the list for pull forward are non perishable groceries, household items. So both of those things you need in your day to day life and then clothing and apparel as well, which I thought was interesting. But that's been one thing that's been in the news a lot, that's heavily manufactured overseas. So people were thinking about that. And this does align overall with our March survey data where we asked what categories people were most concerned about seeing price increases. So their behavior did line up with what they were concerned about in March. Aruna, your turn on tariffs. Now the reason tariffs have been on consumers minds is because of what they might mean for price levels and inflation. Throughout earnings season. We heard a lot of companies talking about raising prices to offset the cost of tariffs. What does this look like from an economist's perspective? Has this actually started to show up in the inflation data yet?

[B]

So not quite yet. And that's something that, as you might expect, we're tracking very, very closely. So one of the things that our team did was to think about which types of goods or services were going to be impacted by inflation. And so we think that that first order effects are going to be on goods. And we think that the effects could start to show up in the May data. But we really see that sequential pace of inflation starting to step up starting June. And then in our third quarter inflation estimate, we see that number peaking for the year. So in the third quarter we think that core PCE inflation number is going to be about 4.5%. Q.

[A]

You analyzed and then aside from tariffs and inflation, how are people going to be affected by fiscal policy? Specifically the tax bill that just passed the House.

[B]

So the House version of the bill has government spending reductions that can be quite regressive for different cohorts of the consumer. So we have reductions around the Medicaid program, cuts to the SNAP program, as well as possible elimination of the income driven loan repayment plans. These would have a pretty adverse impact on the lower income and the middle income consumers. This could be but will likely not be fully offset by the removal of taxes on TIPS and overtime. And then on the other side, the higher income consumers could benefit from some of that increase in solid caps. But overall the jury is still out on how the aggregate consumer will be affected.

[A]

So taking this all into account, the effects of fiscal policy, of tariff policy, of labor market income, what's your overall outlook on US Consumption for the rest of the year?

[B]

So we recently published our mid year outlook for US economics and our forecast for consumption spending over 20, 25 and 26 does see the consumer slowing. And this is really due to three factors. The first is on the back of those greater tariffs and the uncertainty around them and the fact that we have slowing net immigration, we're going to be expecting a slowdown in the labor market. As pace of hiring slows, you have a slower growth in labor market income and that really is the main driver of aggregate consumption spending. And then as we talked about, we are expecting that pass through of higher tariffs into inflation and that's going to impact real spending. And then finally the uncertainty around tariffs, the volatilities in equity markets could weigh on consumer spending and may actually push the upper income cohorts, the big drivers of consumption spending in the economy to have higher precautionary savings. And so with all of that, we see our nominal consumption spending growth slowing down to about 3.9% by the end of this year.

[A]

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. Arunima, thank you for taking the time to talk.

[B]

Thanks so much for having me, Michelle.

[A]

And thank you 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. 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.