Morgan Stanley Sees a Red Flag in Concentrated Confidence Boom

  • Sentiment increase seen driven by middle-income Republicans
  • Lack of broad-based gain could weigh on consumer spending

The middle class is quite confident in the U.S. economy. But everyone else is less so. And that could be a big problem for consumer spending, says Morgan Stanley.

“Confidence among middle-income households has risen more than 30 points since the election, while nearly all other income groups have experienced a single-digit rise,” Ellen Zentner, Morgan Stanley’s chief U.S. economist, wrote in a note Thursday. “Data also show a 40-point divergence between sentiment among Democrats and Republicans.”

This is the group that has largely felt left behind during the economic recovery, but stands to benefit from a number of policies that Trump campaigned on, such as lower taxes and less regulation, which would benefit small businesses. However, without a broad-based surge in confidence, Zentner and her team worry that we might not see the large increase in consumer spending that we otherwise would. 

Morgan Stanley: Confidence by income

“The takeaway from this is that the surge in post-election sentiment has been driven primarily by middle-income Republicans, not shared broadly,” Morgan Stanley said.

For the lower-income groups, such as those under $35,000, the boost in confidence might be dampened by a timing quirk this tax-filing season. Consumer spending could be slowed by as much as $21 billion because of a change aimed at preventing fraud, which is delaying tax refunds, Goldman Sachs Group Inc. Economist Spencer Hill said in the note this month.

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