Megatrends: Counting on the Long-Term Strength of U.S. Consumers

Though many households are doubtless still feeling the aftershocks of 2020’s sharp, but short-lived, economic downturn and lingering inflation, U.S. consumers, on the whole, have experienced a remarkably fast recovery.

Just how fast? The last business cycle, which spanned more than 10 years following 2008’s Great Financial Crisis, never saw consumer spending reclaim its pre-crisis level. In comparison, spending had already returned to its pre-pandemic trend in early 2021—only about a year following the COVD-19 recession.

What accounts for the difference this time? 

Years of household debt reduction before the pandemic and ample government stimulus left consumers generally in better shape to withstand and emerge from the latest recession. Now, U.S. households are enjoying higher incomes, record gains in wealth and strong balance sheets amidst one of the fastest U.S. economic recoveries in history. All this is setting the stage for a powerful consumer-spending boom that could propel economic growth and stock prices for years to come, particularly as Millennial consumers enter their prime earning years.

Here’s a closer look at the three factors we see driving this U.S. “consumer megatrend”—and how we think investors can benefit:

1.   Wages have recovered to all-time highs: Thanks in part to stimulus checks and expanded unemployment benefits, 2020 saw personal income grow at its fastest rate since 2000. Even when factoring in the end of pandemic-era stimulus, the underlying income trend remains quite strong, and wages across the private sector and government have now exceeded their 2019 levels. 

Wages Have Recovered to All-Time Highs
Personal Income Wage & Salary Disbursements, in Trillions

2.  Household wealth has hit a record high: The “wealth effect” is a behavioral economic theory that says people tend to spend more as the value of their assets rises—and today, it’s never been stronger in terms of aggregate household net worth and its rate of growth. Household wealth rose by over 20% year-over-year through the first half of 2021, the largest annual growth rate on record, and is now more than six times annual gross domestic product (GDP), also a record, with appreciation in equities and real estate driving most of the gains. Should stocks or home prices decline, there is a risk that consumer confidence could erode, but given the sheer extent of household wealth today, we believe consumption will remain strong, potentially driving meaningful investment flows in the years ahead.

U.S. Household Net Worth Has Hit a Record High
U.S. Household Net Worth, in Trillions

3.   Consumer balance sheets are healthy: Strong household balance sheets could also contribute to robust spending. The pandemic helped send savings rates to historically high levels, but the trend of households reducing their debt was already in place before COVID-19, with the U.S. household debt-to-GDP ratio falling nearly 20 percentage points following the crisis, from 96.5% in 2008 to 77.8% in 2021. With this debt-reduction trend likely in the rear-view, consumer spending growth in this cycle could look more like the booming early 2000s than the post-crisis 2010s. 

U.S. Household Debt-to-GDP Ratio Is Down Nearly 20% Since 2008 Peak
U.S. Household Debt-to-GDP Ratio

At the center of the new consumer megatrend are Millennials, now the U.S.’s largest living adult generation, who will go through their higher earning and spending years over the next decade. Investors looking for related opportunities should focus most sharply on areas likely to benefit from Millennials’ growing spending power. Consider the following:

• Travel and leisure could see near- and longer-term tailwinds. The sector could benefit as the world emerges from the pandemic and people travel more. Looking out over the course of the business cycle, this type of discretionary spending may also benefit from the “wealth effect” on retirees as well as on the growing population of Millennials, who have garnered a reputation for prioritizing “experiential spending,” at least in earlier life stages.¹ Note also that the nature of experiential spending, itself, is changing, with growing popularity of virtual experiences driving increased adoption of virtual reality and augmented reality technology.

• Certain areas of consumer retail stand to gain. Morgan Stanley Research has found that consumers ages 35-44 and 45-54 tend to spend the most on apparel, and in the years ahead, we believe brands with high share among Millennials stand to benefit from this propensity. The pandemic also accelerated demand for online purchasing, and younger generations are likely to continue to use e-commerce and direct-to-consumer channels. This bodes well for e-commerce leaders, as well as those helping enable the trend, such as social platforms and logistics providers.

• The U.S. housing market could benefit, with demand for homes likely increasing as Millennials age and as remote work continues. The pace of household formation fell to multi-decade lows after the 2008 crisis, but the trend started turning up in 2015 and is likely to stay on that path. We believe favorable supply-and-demand trends will likely continue to benefit the U.S. housing market in the long term. We also expect robust homebuilding activity as builders play catch-up after a period of tight supply.

My team of thematic investment strategists strongly believes that Millennial spending trends will enjoy tailwinds over the coming years, despite potential continued inflationary pressures—and this could lead to targeted investing opportunities. At the same time, we note that investors will need to be flexible in identifying beneficiaries of that spending, as specific consumption patterns may change. As the consumer environment evolves, your Morgan Stanley Financial Advisor can help identify opportunities that are right for you.

Find out more in our team’s AlphaCurrents report, “Riding the U.S. Consumer Megatrend”—and connect with your Morgan Stanley Financial Advisor to learn how your portfolio can benefit from this next wave of consumer spending.

• How can I position my portfolio for resurgent consumer spending?

• Of the areas that are likely to benefit from Millennials’ growing spending power, which (if any) should I consider investing in?

• Are there specific stocks or funds that might help me gain exposure in my portfolio to these consumer trends?