Morgan Stanley
  • Research
  • Mar 11, 2016

Can US Consumers Come to the Economic Rescue?

Cheap oil, jobs growth and higher wages have fueled a broader-based consumer revival, with momentum in 2016. We look at what sectors could stand to benefit.

Until recently, a telling sign of the uneven US economic recovery were the strong sales of big-ticket categories, such as pleasure boats and aircraft, back in 2013. Last year, it was motorcycles, sales of which grew 15%, in what appears to be a more promising indicator of a broader-based consumer revival, amid lower oil prices, the steadily improving jobs market, and higher wages at the larger and deeper end of the labor pool.

Could it be that the US consumer, a pillar of the American and, therefore, world economy, is standing tall and confident once more?

If so, it couldn’t come at a better time. China, the world’s biggest engine of growth in recent years, is slowing as it tries to retool its economic model. Emerging markets are, by and large, retrenching. Europe continues to teeter from one economic and political crisis to the next. Japan recently shocked markets by adopting negative interest rates for the first time ever.

Can the US consumer come to the rescue? The answer is: Maybe.

“On net, real consumer spending accelerated to an average annual growth rate of 3.1% in 2015, the fastest pace of spending since the financial crisis,” says Paula Campbell Roberts, Morgan Stanley’s US consumer analyst. In fact, if not for a rise of 0.4 percentage point in the personal savings rate, the pace of spending would have increased by 3.5% last year, which would have been the fastest pace since 2005.

The New Cautious American Spender

What does this mean? The American consumer has become a more cautious, smarter spender, which is not a bad thing. Household debt is down and savings are up, both considered long-term positives for sustainable economic expansion.

According to Roberts, by far the most frequently asked question regarding the US consumer in 2015 was, "did they spend the gas savings?" The answer, she says, is an unequivocal "Yes." Cheap gas left its mark with SUVs preferred over cars, soaring weekly gasoline demand and vehicle miles driven, leading 2015 to be the most traveled year on record.

“We track over 300 categories of spending, and the benefits of lower gasoline prices were quite obvious in some of them,” she says. Discretionary categories where middle and lower-income groups tend to spend, reaped the benefit of rising wages and minimum wage increases in low-paying sectors. TVs and personal computers topped the list for a second consecutive year. Millennials made an impact, with beefed up sales of all kinds of smart gadgets. Restaurants, travel (hotel occupancy also had its best year on record), home improvements, and, yes, motorcycles, all benefited from stronger demand.

These are signs that the shift toward a better balanced consumer, which began in 2014, continued in 2015. One indication of this is changes in confidence among income groups. According to the Conference Board, confidence fell by nearly four points for the wealthiest group, perhaps due to volatility in markets and investment values, but rose by nearly six points among the poorest last year.

Offsets and Headwinds

Offsetting the increased spending in many areas was the burden of rising health-care costs for many employees, which disproportionately weighed on the middle class, and rising rental costs, which weighed on the growing number of renters.

There are other headwinds. Economic growth is expected to slow this year, and the Morgan Stanley US economics team is not expecting consumer spending to grow beyond the mid-2% range in 2016. But even in a slow growth environment, pockets of momentum can be found.

Here are Roberts’s top six consumer spending themes for 2016:

  • Value-focused consumer
  • Preference for "experiences" versus "things"
  • Continued rise in technology-enabled shopping (via eCommerce, voice, mobile or social networks ) at the expense of brick-and-mortar shopping
  • Convenience and expedience are priorities
  • Consumers are willing to pay more for health and wellness
  • Personalization, with shoppers increasingly expecting tailored offerings or communications 

For more Morgan Stanley Research on the outlook for US consumers, ask your Morgan Stanley representative or Financial Advisor for the full report, “US Economics: What Consumers Want” (Feb. 8, 2016). Plus, more Ideas.

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