Tariffs&Immigration: Trouble ahead for the US consumer, Morgan Stanley warns

Investing.com -- The U.S. consumer could be facing more extreme slowdown next year as tariff-related storms wash over the economy and reaccelerate inflation immigration reform makes a dent in the job market.

"In 2026, tariffs result in a reacceleration in inflation and further slowing in labor demand, resulting in a more extreme slowdown in consumption," economists from Morgan Stanley (NYSE: MS) said in a recent note.

Consumption, which makes the bulk of economic growth, has been trending above expectations, increasing at a 4.2% annual rate, and "durable goods helped drive this strength," the economists said.

The acceleration in spending was driven by increased spending on motor vehicles, sports and recreation vehicles, and furniture, while temporary factors including hurricane impacts and potential pulled forward demand ahead of policy changes also boosted spending.

Spending on durable goods is expected to remain solid in 2025 as years of deflation have made durable goods relatively cheap, likely helping demand, the economists added, though they cautioned that the impact of tariffs as well as crackdown on immigration are likely to alter this dynamic.

"Consumption slows in 2025 as less immigration leads to less growth in labor compensation and real disposable income," the economists said.

The economists forecasts real consumption growth to slow to 2.0% in the fourth quarter of 2025 and further to 1.3% in Q4 2026, following an increase of 3.2% in Q4 2024.

The job market, meanwhile, is expected to "slow throughout 2025 on the back of immigration policy changes," the economists said, projecting nonfarm payrolls to slow from an average monthly change of 166,000 in 2024 to 112,000 in 2025 and just 28,000 in 2026.

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