Transcript
Arunima Sinha (0:00)
Welcome to Thoughts on the Market. I'm Arinima Sinha from Morgan Stanley's global and U.S. economics team. It's been almost three months since President Trump took office and today we want to take the pulse of the US consumer. It's Tuesday, April 1st at 10:00am in New York. We recently lowered our forecasts for nominal consumption spending in 20, 25 and 26 on the back of increased policy uncertainty and we now see bigger downside risks to consumption. To understand what's happening, I'm joined by my colleagues James Egan, Morgan Stanley's co head of US Securitized Products Research, and Heather Berger from the US Economics team. Heather, I want to come to you first. Could you walk us through our view for the year in the context of where consumption spending is now?
Heather Berger (0:52)
What we've seen is that 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. 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. What's really been supporting consumers and supported spending last year has been continued growth in labor income as well as significant accumulation of we which has really supported high income consumers. Heading into this year we did expect that consumer spending growth would slow largely because of the impacts of tariffs and immigration, and we did lower our spending forecast from where we had them at the end of last year. So far we do think that most of the weakness has been in the soft data in terms of sentiment. But we still do expect that these policy changes will result in further slowing throughout the year. But even though the consumer at an aggregate standpoint has been holding up the there has definitely been bifurcation under the surface over the past few years with lower income and middle income consumers in many cases feeling more stretched. And so Jim, we've definitely seen some of that play out in the delinquency data. Can you tell us a bit about what you've seen there?
James Egan (2:05)
Right Heather, as you're referring to, delinquencies are climbing, but we do think you have to look under the hood a little bit here. Let's start with the auto space. Delinquency increases started with lower credit score lower income consumers, but recently we've seen delinquencies start to rise for prime auto loans as well. If you look at the mortgage space and given how tight lending standards have remained over the course of the past 15 to 17 years since the great financial crisis, we're talking about a prime consumer there. Delinquencies are rising, but they're rising in smaller corners of the market. For instance, the non qualified mortgage space, which makes up roughly 1 to 3% of annual originations. And we think it's important to note that these increases aren't uniform across product types. When we look at unsecured consumer products or credit cards, we aren't seeing the same amount of increase in delinquencies that we've noted in the auto space. On top of that, if we do look at autos and also the mortgage space, delinquencies are increasing. And while defaults and losses are higher too, they aren't increasing at the same rate that the delinquency climbs would suggest that means that the consumer isn't rolling into default at the same rate that they have historically. When you put it all together, this increase in delinquencies, it is definitely worth paying attention to and we are paying close attention here. However, from the perspective of securitized products, it's not necessarily something that has us moving all the way towards cautious just yet.