Episode Details

Our U.S. Public Policy Strategist Ariana Salvatore joins our Deputy Global Head of Research Michael Zezas to consider the consumer outlook and how it may impact the November midterm elections. 

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----- Transcript -----

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's U.S. Public Policy Strategist. 

Michael Zezas: And I'm Mike Zezas, Deputy Global Head of Research. 

Ariana Salvatore: 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 9am in New York.  

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: 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 U.S. to learn about each other in a more informal way, brainstorm… And it's been really interesting. 

We've had a lot of meetings with leadership from different prominent consumer companies throughout the U.S. 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 meaningful way higher-income consumers' behavior.  

You're 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 challenged segment of the consumer market right now.   

Ariana Salvatore: Let's talk a little bit more about tariffs. It's our economists’ 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? 

Michael Zezas: It is. 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 into place after the Supreme Court struck down the use of IEEPA, 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: 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 Trumpimposed those Section 301 tariffs, we think that's likely to stay the case. That means the vast majority of the goods trade between the U.S., 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 mo