What to Watch Ahead of the Midterms

With voters focused on prices and the economy, our Head of Public Policy Research Ariana Salvatore and U.S. Thematic Strategist Michelle Weaver discuss the consumer trends that could matter most heading into November’s elections.

Read more insights from Morgan Stanley.

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

Michelle Weaver: And I'm Michelle Weaver, Morgan Stanley's U.S. Thematic Strategist.

Ariana Salvatore: Today, we'll be talking about the consumer and what recent data could imply for the midterm elections.

It's Wednesday, July 1st at 10am 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: We run a monthly proprietary survey of around 2,000 U.S. 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 U.S. economic outlook.

We're not off to the races by any means, but we did see the net outlook score improve to -10 percent, up from -14 percent a month ago and a low of -18 percent 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: That makes sense given the MOU that was signed between Iran and the U.S. Now, looking forward, what does the survey tell us about spending plans?

Michelle Weaver: 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: 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: 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 U.S. 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: 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 a 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 U.S. 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 percent. 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, tax refunds running about 17 percent higher year-over-year, but the oil shock basically mitigated that and essentially neutralized the fiscal impulse.

But that's not hitting everybody equally. Goods 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 percent of spending for the bottom income quintile versus under 5 percent 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.

But maybe let's drill in a little bit more on that income bifurcation. How does that manifest in your view across spending intentions?

Michelle Weaver: Mm-hmm. Overall, short-term spending intentions – so spending plans over the next month – are net +20 percent this month. That's still above the historical average of around +16 percent, but it is down somewhat from 23 percent last month. And the divergence is really driven by income. Upper-income consumers remain meaningfully more optimistic, while lower-income households are still under stress.

So, we're still seeing the K economy very much in place. And the economy and inflation are almost always top issues for voters. How are you expecting the dynamics we've been talking about to impact the midterms?

Ariana Salvatore: So, data are showing an uptick, obviously, which should on net benefit Republicans all else equal, albeit off a low base. And that's because there are other data points to consider here. So, things like the generic ballot, things like historical precedent, things like the presidential favorability ratings – all of those things are painting a more constructive backdrop for Democrats heading into November.

But also, to put a finer point on it, we're seeing the AlphaWise data that you're citing reflected across other surveys as well. So, we saw the UMich data from last week show the year ahead inflation outlook drop to 4.6 percent from 4.8 percent. And of course, that's a reflection of the expectation that gas prices are going to moderate into November too.

Now, on that front, it's about rate of change, right? So, not the absolute level. But again, I would just remind our listeners that this is one factor in the context of many.

So, net-net, we definitely still see a slight advantage for Democrats heading into November, especially when we drill into some of the trends that we've been seeing across the primaries.

Michelle Weaver: And what are some of those trends you've been picking up from the primaries?

Ariana Salvatore: So, the first thing I would say is that we're cautious to extrapolate too much from primaries to the general election, but really maybe two key points here. The first is turnout seems to be an early indicator in favor of Democrats. So, enthusiasm is up. We're seeing more participation and more engagement relative to prior elections.

The second point I would make is that the primaries have been showing a mixed bag in terms of candidates for November. So, in some states like New York and Colorado, you saw more progressive candidates win their races. And all else equal, that could translate to more of what we call a fragile instead of a cohesive majority come November.

So, think more political noise around fiscal deadlines, things like appropriations and the debt ceiling. But of course, we still have less than 50 percent of the primaries, so plenty to watch heading into the fall.

Michelle, thanks for taking the time to talk.

Michelle Weaver: Thanks for having me.

Ariana Salvatore: And thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.