What to Watch Ahead of the Midterms

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

**Michelle Weaver** (0:05)
And I'm Michelle Weaver, Morgan Stanley's US Thematic Strategist.

**Ariana Salvatore** (0:08)
Today, we'll be talking about the consumer and what recent data could imply for the midterm elections. It's Wednesday, July 1st at 10 a.m. in New York.
Last week, Mike Zezas 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?

**Michelle Weaver** (0:38)
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 US economic outlook. We're not off to the races by any means, but we did see the net outlook score improve to negative 10% up from negative 14% a month ago, and a low of negative 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.

**Ariana Salvatore** (1:24)
That makes sense, given the MOU that was signed between Iran and the US. Now, looking forward, what does the survey tell us about spending plans?

**Michelle Weaver** (1:32)
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.

**Ariana Salvatore** (2:00)
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?

**Michelle Weaver** (2:07)
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 percent, up from 59 percent last month, and a low of 53 percent in January. People are also worried about the US political environment. That was cited by 42 percent of consumers, up from about 39 percent last wave. Concern around geopolitical conflicts rounds out the top three, but that level's been pretty stable, around 25 percent.
But Ariana, 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?

**Ariana Salvatore** (2:48)
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's 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 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.