Megatrends: Counting on the long-term strength of US consumers

Morgan Stanley Wealth Management


Summary: Rising incomes, record levels of household wealth, and healthy personal finances could drive a consumer-spending boom that powers stocks for years to come. Learn how your portfolio may benefit.

Though many households are doubtless still feeling the aftershocks of 2020’s sharp, but short-lived, economic downturn and lingering inflation, US 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 consumers paying down debt before the pandemic and ample government stimulus left them generally in better shape to withstand and emerge from the latest recession. Now, US households are enjoying higher incomes, record gains in wealth, and more balanced budgets amid one of the fastest US 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 Morgan Stanley Wealth Management’s Global Investment Office sees driving this US “consumer megatrend”—and how investors may 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 exceeded their 2019 levels.

Wages have recovered to all-time highs

Line chart displaying personal income wage & salary disbursements, in trillions

Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office as of Nov. 16, 2021

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, 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 with many households on solid footing, consumption will likely remain strong—potentially driving meaningful investment flows in the years ahead.

US household net worth has hit a record high

Line chart displaying US household net worth in trillions

Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office as of Nov. 16, 2021

3. Consumer finances are healthy

Strong household budgets could also contribute to robust spending. The pandemic helped send savings rates to historically high levels, but the trend of households paying down debt was already in place before COVID-19. The US household debt-to-GDP ratio fell nearly 20 percentage points following the crisis, from 96.5% in 2008 to 77.8% in 2021. With consumers generally in a better position to open their wallets, spending growth in this cycle could look more like the booming early 2000s than the post-crisis 2010s.

US household debt-to-GDP ratio is down nearly 20% since 2008 peak

Bar chart displaying US household debt-to-GDP ratio

Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office as of Nov. 16, 2021

Where will all this money be spent?

At the center of the new consumer megatrend are Millennials, now the US’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, brands with high share among Millennials may 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 US 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. Supply-and-demand trends will likely continue to benefit the US housing market in the long term, with robust homebuilding activity as builders play catch-up after a period of tight supply.

Riding the next consumer-spending wave

Despite potential continued inflationary pressures, Millennial spending trends could enjoy tailwinds over the coming years. At the same time, investors will need to keep an eye on any major shifts in spending behaviors, as that could affect the industries and companies that stand to benefit. As always, make sure to do your homework before investing. Portfolio decisions should reflect individual goals, timelines, and risk tolerance.

The source of this Morgan Stanley article, Megatrends: Counting on the Long-Term Strength of U.S. Consumers, was originally published on 2/15/22.

  1. McKinsey & Company, “Cashing in on the US experience economy,” 12/11/17

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