Podcast Summary: "What’s Weighing on U.S. Consumer Confidence?"

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: What’s Weighing on U.S. Consumer Confidence?
• Release Date: April 2, 2025

Introduction

In this episode of Thoughts on the Market, hosted by Arunima Sinha from Morgan Stanley's global and U.S. economics team, the discussion centers on the current state of U.S. consumer confidence. Released on April 2, 2025, the episode delves into the factors influencing consumer spending, policy uncertainties, and broader economic implications. Joining Arunima are James Egan, co-head of U.S. Securitized Products Research, and Heather Berger from the U.S. Economics team.

1. Overview of Consumer Spending and Sentiment

Heather Berger opens the conversation by outlining the recent trends in consumer spending:

"Through the end of last year, consumer spending growth actually held up pretty well. We saw that nominal and real spending growth both outpaced the pre-COVID averages in 2024 and there was actually strength into the end of the year as well." (00:52)

However, Berger notes a shift in the current year with signs of weakening:

"So far this year we have seen that there has been more weakness in terms of consumer sentiment as well as some of the spending data has been a bit weaker, a bit sooner than expected." (01:15)

Key factors supporting consumer spending last year included growth in labor income and the accumulation of wealth, particularly among high-income consumers. Berger anticipates a slowdown in consumer spending due to increased policy uncertainty, including tariffs and immigration impacts.

2. Rising Delinquencies and Their Implications

James Egan provides an analysis of the delinquency trends:

"Delinquencies are climbing, but we do think you have to look under the hood a little bit here." (02:05)

Egan highlights that while delinquency rates are increasing in sectors like auto loans and mortgages, the rise is not uniformly spread across all product types. Notably:

• Auto Loans: Initially, delinquency increases were seen among lower credit score and lower income consumers. Recently, delinquencies have started to rise among prime auto loans as well.

• Mortgages: Delinquencies are increasing in the non-qualified mortgage space, which constitutes about 1-3% of annual originations. However, defaults and losses are not escalating at the same rate as delinquency climbs.

"From the perspective of securitized products, it's not necessarily something that has us moving all the way towards cautious just yet." (03:00)

While the uptick in delinquencies is a concern, Egan suggests it isn't indicative of a systemic risk at this stage.

3. Impact of Tariffs and Policy Uncertainty

Arunima Sinha explores the implications of recent tariff implementations:

"We looked at the 2018-19 experience to think about how it could matter for consumers today." (03:45)

She explains that tariffs may limit consumers' ability to switch expenditures to lower-cost alternatives due to ongoing uncertainty. Drawing parallels to past Fed studies, Sinha emphasizes that lower-income cohorts are disproportionately affected by higher inflation rates stemming from tariff-related expenditure shifts.

Additionally, Sinha discusses wealth effects:

"Over the post-COVID phase between 2020 and 2024, we had a tremendous increase in net worth for US households, it went up by more than $50 trillion." (04:37)

This surge in wealth primarily benefited the top 20% income cohort, increasing their exposure to equity markets. Potential downdrafts in these markets could lead to reduced spending, particularly among high-income consumers.

4. Immigration Trends and Labor Market Effects

Sinha further addresses the impact of immigration on consumer confidence:

"We think that it'll be the supply effects from reduced immigration that are going to matter just given the characteristics of the immigrants who are coming in." (04:41)

Reduced immigration is expected to temper labor force growth, affecting labor market income—the main driver of consumption for lower and middle-income cohorts. With fewer young, high-participation immigrants entering the labor market, income growth may slow, thereby dampening consumer spending.

5. Fiscal Policy Changes and Their Consequences

Heather Berger outlines the current fiscal landscape and its potential effects:

"We expect that the Tax Cuts and Jobs Act will be extended by the end of this year and there may be a few add-ons, but we don't really expect any meaningful additional spending cuts." (06:19)

Berger warns that further spending cuts, especially in areas with high economic multipliers like entitlement programs, could pose additional risks to consumption and GDP growth. Such cuts would disproportionately impact lower-income consumers unless offset by increases in tax refunds, which have been trending higher:

"The average size of tax refunds and the total dollar amount of tax refunds has been trending high relative to recent years." (07:07)

This trend may provide a temporary boost to consumer incomes in the near term.

6. Housing Market Outlook

Closing the discussion, James Egan provides insights into the U.S. housing market:

"Affordability in the US Housing market is stretched." (07:14)

Key points include:

• Housing Supply Constraints: Low inventory levels continue to pressure home prices upward. Egan notes that approximately 24% of construction materials are imported, linking back to tariff uncertainties that may further drive up costs.

• Mortgage Rates vs. Home Prices: To maintain affordability, mortgage rates would need to decrease significantly if home prices rise by projected margins.

• New Home Market Dynamics: New home sales are seeing heightened activity, the highest since 2006, driven by a severe underbuilding issue. Current estimates suggest a shortfall of approximately 1.1 million units needed to meet demand, contributing to sustained upward pressure on prices.

"We're moving closer towards our bull case from our 2025 outlook. That bull case was plus 5% year-over-year home price growth." (09:03)

Egan concludes that despite affordability challenges, the housing market is likely to continue its upward trajectory in home prices, supported by persistent demand and constrained supply.

Conclusion

The episode provides a comprehensive analysis of the factors currently impacting U.S. consumer confidence. While consumer spending has shown resilience, underlying weaknesses in sentiment, rising delinquencies in specific sectors, policy uncertainties around tariffs and immigration, and constrained housing supply present significant downside risks. Fiscal policies remain a pivotal factor, with potential extensions of tax cuts offering temporary relief amidst broader economic headwinds.

For listeners seeking to understand the multifaceted influences on the U.S. consumer landscape, this episode offers valuable insights from leading Morgan Stanley economists.