Morgan Stanley | During the first weeks of 2026, macro data has been particularly strong (retail sales / regional PMIs / jobless claims), pointing to greater momentum in consumer spending and less downside risk for the labour market and manufacturing activity. All this with limited upward pressure on inflation, allowing expectations to remain that the Fed will cut rates later in the year. According to Mike Gapen (US macro), this scenario presents a macro outlook for 2026 that is ‘as good as it gets’. In fact, data published by the Fed for Q3 2025 shows that consumption has returned to above the model’s target level for the first time since 2023. According to Gapen, this behaviour is due to cyclical forces: the labour market has only slowed gradually, the pass-through of tariffs to inflation has been moderate, the Fed has lowered rates and credit conditions have remained favourable.
Looking ahead, Gapen expects this excess consumption to continue, supported by benign cyclical conditions: if inflation continues to moderate, real income growth will increase and the labour market is expected to stabilise in 2026, while additional monetary policy support (further Fed rate cuts) and fiscal support will remain in place. However, the fact that consumption exceeds its wealth-driven target level also implies that downside risks are greater than in recent years. A confidence shock generating persistent volatility in asset markets could trigger a sharp adjustment in spending among higher-income households, which have been the main driver of recent consumption momentum.
