Welcome to Thoughts on the Market.
We're coming to you live from Morgan Stanley's Global Consumer and Retail Conference in New York City, where we have more than 120 leading companies in attendance.
Today's episode is the first in a two-part special focused on the consumer, where we'll focus on the K economy and the health of the US consumer.
Tomorrow for the next episode, we'll turn our attention to AI.
My colleagues and I are eager to dig into this discussion.
With me on stage, we have Arunima Sinha from the Global and U.S.
Economics team, Simeon Gutman, our U.S.
Hardlines, Broadlines, and Food Retail Analyst, and Megan Clapp, U.S.
Food Producers and Leisure Analyst.
It's Thursday, December 4th at 10 a.m. in New York.
So to start, I want to go through the health of the consumer.
That's, of course, been a theme that's been on display at the conference today.
And 2025 has really been a year of mixed signals.
But overall spending has held up, while inflation has weighed on confidence, especially among lower and middle income households.
Arunima, I want to start with you on the macro front.
As we head into year end, how would you describe the overall state of the consumer?
What are you expecting in terms of real wage growth and spending?
If we just look at the rear view mirror, in terms of Q1 through Q3 this year, spending growth on a real basis has been holding up.
So in the first half of this year, about 1.5% on average.
For the third quarter.
Given the data that we do now have in hand, we're tracking about 3 quarter on quarter on a real basis.
But I think it is important to emphasize that this is already a step down than the numbers that we were seeing last year.
So in 2024, on these Q on Q numbers, we were running somewhere between 3.9% and 4%.
So there already has been some slowdown.
The recurring theme that we've had this year is how are the drivers of consumption going to weigh on different cohorts?
And so how is the labor market going to weigh and how are wealth effects going to play out?
And that's sort of tied in squarely with the narrative that we've been emphasizing this whole year, which is that for the upper income cohorts those net wealth effects have been very, very supportive.
$50 trillion in net wealth that's been created just over the last three years.
And that's continued for this year as well.
And so meanwhile, the labor market has downshifted.
And that's how to read through into both just nominal wage growth as well as real wage growth.
So, for example, on a three month, three month basis, that real wage growth, after we've adjusted for the nominal, for inflation, has slowed down, essentially to stall speed.
It used to run somewhere between two, two and a half percent in the first part of this year.
And that we think is going to have a read through as we go into this upcoming quarter of Q4, as well as in the first quarter of next year.
So just this lagged effect from the slowdown on labor market income is going to continue to weigh on the middle income and sort of the upper lower part of the income cohort.
So, in terms of our growth forecasts for spending over this quarter in Q4 and over next quarter in Q1, we are expecting about 1 real growth for consumption.
That is a two percentage point step down from where we were in Q3.
And then just in terms of disposable income, we're also thinking this particular quarter in Q4 is going to be fairly weak.
You spoke a little bit about the different income cohorts there, but I want to double click on that.
The K economy has been a really persistent theme, as higher income households have benefited from strong market returns, but higher price levels have weighed on lower income households.
What are your expectations for the high versus low income consumer next year?
So next year, we do think that there could be some broadening out in consumption growth.
Just overall, we have a sequential step up in growth that begins to take place starting in the second quarter of 26.
So we have consumption growth that starts to slowly inch up, from about just under 1 in the first quarter of 26 all the way up to about 2 by the end of the year.
What that's going to be driven by.
We think that there are going to be some lessening of pressures on the middle income cohorts.
And where is that going to come from?
It's going to come from perhaps a still moderate labor market.
So we don't think we're going to be seeing these big 100, 150,000 plus jobs being added every month.
We're thinking maybe about 60,000 on average per month for most of next year.
But just less policy uncertainty, some boost from the fiscal bill, the fact that monetary policy is going to be heading towards neutral all of those things should be supportive.
Given that the upper income didn't really slow down this year, we'd also don't think there's going to be a giant acceleration next year.
And so some of that uptick in consumption growth we think could actually come from the middle income.
And we also think that some of those tariff pressures on inflation are going to start to dissipate after peaking in the first quarter next year.
And Simeon, I want to bring the company side into the conversation.
What's the early read you've gotten on Black Friday?
Expectations into the shopping season were pretty weak.
Do you think things could turn out to be better than feared?
And are you seeing any differences by income cohort there?
The overall take is it's mixed to maybe slightly a little worse.
I'll answer it in a few different ways.
First, the old-fashioned tire kicking that the retail analysts have done during the holiday season in our hardline, broadline food retail space, mixed to slightly, a little worse.
In Alex Stratton's softline world, sounded a little bit better.
And then if we combine the takeaways that we've had from companies, at least who presented yesterday Walmart, Target and some other category killer retailers sounded about in line underlying trends, relatively stable.
I sat on a panel earlier today with a data aggregator who suggested that the holiday was a little underwhelming.
What we don't see and the underwhelming being at a minus 2 run rate for the I guess the November to date period that doesn't include Cyber Monday.
What this doesn't account for is the market share shifts.
So one of the ongoing themes across the entire retail landscape has been this big, getting bigger we say it a lot but the narrowing funnel of market share.
So the inline updates are probably coming from some of the largest companies, even if the overall holiday was a little underwhelming.
Now, inline is not anything to write home about.
It's harder to get to an inline holiday if you start it out below.
So inline's okay, but not gangbusters.
That's probably the right way to characterize it.
Megan, same question to you.
How's holiday shopping tracking in your space?
Have you learned anything surprising about holiday during the conference?
Yeah, I would, I would agree with Simeon relatively in line.
I'd say kind of so far so good is what we heard from companies at the conference.
We had both Mattel and shark Ninja product companies that sell into many of the larger retailers that are winning that Simeon talked about.
Holiday Matters a lot for both of them.
So we're still many weeks ahead of us in terms of POS, but Mattel talked about positive POS continuing through the Black Friday season.
They left their guidance unchanged today.
They're seeing replenishment from their retailers and orders in line with expectations, which was a question just given some of the uncertainty in the landscape.
Shark Ninja sells small appliances.
They spoke to a strong Black Friday again, seeing the fourth quarter and holiday play out in line with their expectations.
Maybe a couple of themes that stood out, and one of them was particularly interesting to me.
You talked about the K economy.
I think it was very clear.
The higher end consumer continues to spend and outperform.
Value and innovation continue to be things that consumers are looking for.
Online seem to do better than in stores.
That's what we heard from a lot of companies coming out of last week.
And then newer channels like TikTok shop are coming into the mix and brands are seeing, you know, strong growth from those channels as well.
And Arunima, I want to wrap this section on Fed policy.
How do you expect Fed policy in 2026 to influence consumer spending and recovery, especially for those middle and lower income households?
We still have the Fed on an easing path into the first half of 2026.
So we think 75 basis points and additional policy cuts into next year.
But that more or less just takes monetary policy to some estimate of neutral.
So the point is that it's not.
Monetary policy is becoming easier, it is simply just getting to neutral.
And so, if we think about the most interest-sensitive types of consumption, it's going to come from housing and it's going to come from durables.
And what our housing strategists are thinking is that, given this sort of front end of the curve, our 10-year forecast for the middle of next year is still at about 375.
And so mortgage rates could dip below 6%.
So it's not the front end of the curve, it is that sort of belly of the curve there.
That's important there.
And so there could be some pickup in housing that's going to be important.
I think for the middle income, consumer affordability.
We think it's still going to be an important concern for housing, but perhaps the middle income could benefit from some of those lower mortgage rates that are going to come in.
Arunima, Simeon and Megan.
Thanks for all your insights and, to our live and podcast audiences, thanks for listening.
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