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- [00:01]
A
Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's head of Public Policy Research.
- [00:05]
B
And I'm Michelle weaver, Morgan Stanley's U.S. thematic strategist.
- [00:09]
A
Today we'll be talking about the consumer and what recent data could imply for the midterm elections. It's Wednesday, July 1, at 10am in New York. Last week, Mike Zesas and I caught up on the consumer while he was down at our Consumer Captains Conference this week. Michelle, I want to talk to you about what your data are saying and get into the implications of all of this for the midterm elections. So maybe we start with the AlphaWise data. What are our surveys picking up when it comes to how the consumer feels about the outlook in the aggregate?
- [00:38]
B
We run a monthly proprietary survey of around 2,000 US consumers, and it's diversified by age, gender and region, and we ask questions around sentiment, spending plans, and other special topics. Our survey recently showed a continued gradual recovery in consumer confidence in the U.S. economic outlook. We're not off to the races by any means, but we did see the net outlook score improve to minus 10%, up from minus 14% a month ago and a low of minus 18% two months ago when concerns around oil prices were at their peak. Overall, more consumers feel negatively about the economy versus positively, hence that net score is negative. But we are seeing signs of improvement. So things are improving on a rate of change basis.
- [01:24]
A
That makes sense given the MOU that was signed between Iran and the U.S. now, looking forward, what does the survey tell us about spending plans?
- [01:33]
B
Broadly, consumer spending plans remain stable. They expect to spend more on essentials categories. This includes things like groceries, gas and household items. While they're expecting to spend less on discretionary categories, we saw the weakest spending intentions within the consumer electronics category, and consumers are not likely to see much price relief in that category. Many consumer electronics makers are now taking their prices up because of the high price of memory chips that goes into those products.
- [02:00]
A
One of the most important components of the survey is the question that you ask on top areas of concern. What are you guys seeing there?
- [02:08]
B
Inflation is still the number one concern for consumers, and we actually saw the percent of consumers citing it among their top concerns tick up again last month. So now that's at 60%, up from 59% last month and a low of 53% in January. People are also worried about the US political environment that was cited by 42% of consumers, up from about 39% last wave. Concern around geopolitical conflicts rounds out the top three, but that level's been pretty stable, around 25%. But Arianna, can consumers expect any relief on prices from the policy front? Consumers got a nice boost from tax refunds. Is there anything else in the pipeline?
- [02:49]
A
So we've gotten this question a lot into the midterm elections and our view is basically that there are a number of obstacles in the way of something like another reconciliation package to give direct stimulus to consumers. Whether that's procedural, whether it's the political perception, one of the most important is actually the deficit concerns. Right. So we don't expect something additional for the consumer through the legislative angle, aside from what we've already seen like the Road to Housing Act. And that's also against the backdrop of what we've been seeing on the economic side and what your data is reflecting, which is that the consumer sentiment metrics are actually ticking up slightly from their lows. And that of course maps directly onto what our US Econ team has been saying. Their view is that the consumer story in 2026 has turned more neutral. Real consumption growth is still expected to decelerate to about 1.7%. That's below last year, but again not falling off a cliff. The core dynamic is that the one big beautiful Bill act had this fiscal boost from last year. Tax refunds running about 17% higher year over year. But the oil shock basically mitigated that and essentially neutralized the fiscal impulse. But that's not hitting everybody equally good. Spending tends to bear the brunt. Our econ team estimates that the oil shock takes 30 basis points off consumption entirely from goods rather than services low and middle income households are most exposed to. Since energy makes up over 8% of spending for the bottom income quintile versus under 5% for the top. And that broadening out story from just the high income consumer driving spending is probably going to be a little bit delayed just given the oil shock. But maybe let's drill in a little bit more on that income bifurcation. How does that manifest in your view
- [04:27]
B
across spending intentions overall short term spending intentions? So spending plans over the next month are net positive 20% this month. That's still above the historical average of around positive 16%, but it is down somewhat from 23% last month. And the divergence is really driven by income. Upper income consumers remain meaningfully more optimistic while lower income households are still under stress. So we're still seeing the K economy very much in place and the economy and inflation are almost always top issues for voters. How are you expecting the dynamics we've been talking about to impact the midterms.
- [05:03]
A
So data are showing an uptick obviously, which should on net benefit Republicans, all else equal, albeit off a low base. And that's because there are other data points to consider here. So things like the generic ballot, things like historical precedent, things like the presidential favorability ratings, all of those things are painting a more constructive backdrop for Democrats heading into November. But also to put a finer point on it, we're seeing the alpha wise data that you're citing reflected across other surveys as well. So we saw the UMICH data from last week show the year ahead inflation outlook dropping to 4.6% from 4.8%. And of course that's a reflection of the expectation that gas prices are going to moderate into November too. Now on that front it's about rate of change, right? So not the absolute level. But again, I would just remind our listeners that this is one factor in the context of many so net net, we definitely still see a slight advantage for Democrats heading into November, especially when we drill into some of the trends that we've been seeing across the primaries.
- [06:01]
B
And what have some of those trends you've been picking up from the primaries?
- [06:04]
A
So the first thing I would say is that we're cautious to extrapolate too much from primaries to the general election. But really maybe two key points here. The first is turnout seems to be an early indicator in favor of Democrats. So enthusiasm is up. We're seeing more participation and more engagement relative to prior elections. The second point I would make is that the primaries have been showing a mixed bag in terms of candidates for November. So in some states like New York and Colorado, you saw more progressive candidates win their races and all else equal. That could translate to more of what we call a fragile instead of a cohesive majority come November. So think more political noise around fiscal deadlines, things like appropriations and the debt ceiling. But of course we still have less than 50% of the primaries, so plenty to watch heading into the fall. Michelle, thanks for taking the time to talk.
- [06:51]
B
Thanks for having me and thanks for listening.
- [06:53]
A
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- [07:01]
C
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