Consumer Confidence and the U.S. Midterms

**Ariana Salvatore** (0:00)
Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's US Public Policy Strategist.

**Michael Zezas** (0:05)
And I'm Mike Zezas, Deputy Global Head of Research.

**Ariana Salvatore** (0:08)
Today, we'll be discussing the Consumer Outlook, Policy Catalysts, and what it could mean for the 2026 midterm elections. It's Thursday, June 25th at 9 a.m. in New York.
So Mike, you're on the road, obviously not in New York City this week. Why don't you tell us a little bit about the conference that you're at, and then we can get into some of the topics that have come up in your conversations.

**Michael Zezas** (0:30)
Yeah, I'm down in South Carolina at Morgan Stanley's Captains of the Consumer Industry Conference where we put together investors and leadership of key consumer companies in the US to learn about each other in a more informal way, brainstorm, and it's been really interesting. We've had a lot of meeting with leadership from different prominent consumer companies throughout the US and it's been really fascinating to hear how the consumer's been quite resilient, but in general, one pattern that sticks out is rising concern about lower income consumers' behavior starting to lag in a meaningful way, higher income consumers' behavior starting to see substitution and sort of more selectivity amongst lower income households, a pattern that began a bit last year as a lot of these companies would report with higher tariffs that seems to have continued with higher gas prices driven by the conflict in the Middle East. So there's a lot of discussion and concern about how durable it is. And in particular, if there are some policy choices here that might alleviate some of that pressure and bring some fundamental strength to what is a challenge segment of the consumer market right now.

**Ariana Salvatore** (1:51)
Let's talk a little bit more about tariffs. It's our economist's view that we've mostly gotten through the tariff pass-through. Is that the sentiment that you're hearing from corporates and the clients that you're talking to?
It is.

**Michael Zezas** (2:02)
Well, it's certainly the hope. And I guess the follow-up questions here are once some of the temporary tariff authority that was put in the place after the Supreme Court struck down the use of IEPA, will there be a restoration of those tariff levels and will the USMCA negotiations create higher tariffs? So, Ariana, what's your thoughts there? Is there any concern for companies that they're going to start needing to deal with a re-escalation of tariff costs relative to what we experienced, say, last year?

**Ariana Salvatore** (2:39)
Yeah, I think to answer that question, we need to dig into this under the surface a little bit and understand what types of tariffs that we're talking about. So to your question on the USMCA, we see that largely as a story of continuity, right? So the USMCA exemption has been in place since the deal was signed, right? And since Trump imposed those Section 301 tariffs, we think that's likely to stay the case. That means the vast majority of the goods trade between the US, Mexico and Canada is right now not subject to the 301 tariffs.
Now on the other hand, we have existing Section 232 tariffs in place on not just sectors like steel and aluminum, but a bunch of other goods too. And we're supposed to get more of those investigations wrapped up in the next week or so. So on that front, I do think there could be some potential room for escalation. But more broadly speaking, we think the direction of travel is relatively stable, if not slightly lower, because as you mentioned, the IEPA tariffs that were replaced by the Section 122 have to get replaced again end of July, right? So that Section 122 authority was a temporary authority. The president is going to have to replace that with a mix of Section 232 and 301
It's been our view that when that happens, there could be some alleviation for very specific pockets of goods that fall into really neither bucket, right? So they're not necessarily critical for national security and they're coming from countries that are difficult to maintain a Section 301 investigation on. So it's actually very nuanced under the surface. I would say in the aggregate level, what we think is that you're going to see the tariff rate stay somewhere around 8 to 9% on a headline basis, if not directionally, maybe a little bit lower throughout the course of this year.

**Michael Zezas** (4:13)
Got it. And I think that message has been music to the ears of a lot of these companies. And I've been doing these meetings with our chief economist, Michael Gapen, who has said that that's contributing to what he forecasts as being a meaningful deceleration and inflation into the end of the year, certainly an inflation level lower than what the aggregate Fed forecast is at the moment.