Consumer Spending Trends Through Q3

Live from the Morgan Stanley Global Consumer & Retail Conference in New York, our analysts discuss the latest macro trends and pressures impacting the U.S. consumer.

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Michelle Weaver: 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 U.S. 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 Guttman, our U.S. Hardlines, Broad Lines, and Food Retail Analyst, and Megan Clap, U.S. Food Producers and Leisure Analyst.

It's Thursday, December 4th at 10:00 AM 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? 

Arunima Sinha: If we'll just look at the rearview 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 percent on average. For the third quarter, given the data that we do now have in hand, we're tracking about 3 percent, 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 3.9-4 percent. 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 away and how are wealth effects going to play out? And that, 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 has continued for this year as well. And so, meanwhile the labor market has downshifted and that's had a 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 2-2.5 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 weigh; 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 percent 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. 

Michelle Weaver: 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? 

Arunima Sinha: 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 [20]26. So, we have consumption growth that starts to slowly inch up from about just under 1 percent in the first quarter of [20]26 – all the way up to about 2 percent 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're not – we don't think we're going to be seeing these big 100,000-150,000 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. 

Michelle Weaver: 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? 

Simeon Gutman: 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 hard line, broad line, food retail space mixed to slightly a little worse. In Alex Straton’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, it sounded about inline. Underlying trend is 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 percent 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 started out below. So inline's okay but not gangbusters. That's probably the right way to characterize it. 

Michelle Weaver: Megan, same question to you. How is holiday shopping tracking in your space? Have you learned anything surprising about holiday during the conference? 

Megan Clapp: Yeah, I would agree with Simeon relatively inline. 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 – 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 themes that stood out and one of them was particularly interesting to me. You talked about the K economy, I think, you know, 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, and brands are seeing, you know, strong growth from those channels as well. 

Michelle Weaver: 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? 

Arunima Sinha: 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's becoming easier, it is simply just getting too 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 tenure forecast for the middle of next year is still at about 3.75. And so, mortgage rates could dip below 6 percent. 

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. 

Michelle Weaver: ​ Arunima, Simeon, and Megan, thanks for all your insights. And to our live and podcast audiences, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.