American consumers are on the verge of an unprecedented "cash downpour."
According to Morgan Stanley's latest research report released on January 23, personal income is set to surge in the first quarter of 2026, thanks to retroactive provisions in the "One Big Beautiful Bill Act" (OBBBA). Total individual tax refunds are projected to reach approximately $350 billion (around 2.5 trillion Chinese Yuan) by the end of May, a sharp 20% increase year-over-year.
This wave of refunds is not organic growth but a policy-induced "stimulus shot." The OBBBA contains a multitude of retroactive consumer tax cuts for the 2025 fiscal year. Because last year's withholding tax tables were not adjusted in time, consumers will receive these benefits in a lump sum through refunds in the coming months.
Crucial data: Morgan Stanley expects this year's individual tax refund amount to be $40 to $70 billion higher than last year. Assuming the number of recipients remains constant, the average refund size will increase by $550, reaching a record high of approximately $3,500.
Tax cut details: These benefits primarily stem from deductions for overtime pay, tips, senior citizen deductions, auto loan interest, as well as increases to the state and local tax (SALT) deduction cap and enhancements to the child tax credit.
What does this mean for investors? Morgan Stanley points out:
Short-term consumption boost: Although the market broadly expects real consumption growth to slow in early 2026, this massive refund will support spending for the full year, particularly in the first half. Liquidity injection: This is a clear signal of fiscal stimulus that will directly improve household balance sheets, especially for middle-to-high-income groups. Data noise: Investors should be wary of volatility in economic data released in January and March. The surge in income data might be an accounting phenomenon (the BEA records the full-year tax change in January), while the actual cash flow will be distributed in batches during Q1 and Q2.
Who benefits most? Middle-to-high-income earners are the biggest winners.
Unlike previous stimulus policies focused on lower-income groups, the distribution of benefits from the OBBBA shows distinct class differences. Research data indicates that middle-to-high-income earners and older consumers will benefit the most.
Structural divergence: The bottom 10-20% of income earners will see almost no benefit, as they typically owe no federal income tax after various deductions and credits. Benefit breakdown: 38% of the tax cut benefits come from deductions for tips and overtime pay (primarily benefiting middle-income earners). 30% come from the increased SALT cap (mainly benefiting high-income earners and homeowners). 20% come from enhanced senior citizen deductions (benefiting older, middle-income earners).
Income surge vs. moderate spending: Where will the money go?
Morgan Stanley believes that although the income data will look very impressive, the proportion converted into actual consumption (marginal propensity to consume) might be lower than expected.
Income expectations: Driven by tax refunds and lower withholding taxes, Morgan Stanley forecasts that real disposable personal income will increase at an annualized rate of 4.1% quarter-on-quarter in Q1 2026, completely reversing the flat trend seen in the second half of 2025. Spending reality: Not all refunds will be spent. Historical data shows that only about 30-40% of a tax refund is typically consumed in the first quarter after receipt. Given that the primary beneficiaries this time are higher-income and older groups, who generally have a lower marginal propensity to consume, more funds are likely to flow into savings or be used to pay down debt (such as credit cards and auto loans). Model prediction: Morgan Stanley expects the bill to boost real consumption this year by only 20 basis points (the overall impact on GDP is approximately 40 basis points).
Tariff overhang: 16% effective rate and plunging shipping volumes.
While fiscal stimulus is underway, the shadow of a trade war still looms.
High tariffs: Since the Trump administration imposed additional tariffs on August 7 last year, the US effective tariff rate has risen to 16.0% and is expected to remain at a high level of 15-16% through 2026. US Treasury tariff revenues continue to climb, with the rolling 63-day annualized customs and excise tax deposits reaching $391 billion. Shipping downturn: The real economy is already feeling the chill. Following a "front-loading" surge in exports in Q1 2025 to avoid tariffs (actual imports surged 38%), import data subsequently collapsed (down 29.3% in Q2, down 4.7% in Q3). Currently, the weighted average shipping capacity entering the US plummeted to 80% at one point; although it has rebounded somewhat, shipping volumes have not yet recovered.
Macro panorama: Moderate GDP growth, Fed on hold.
GDP tracking: Morgan Stanley has raised its tracking estimate for real GDP growth in Q4 2025 to 2.1% (annualized quarterly rate), primarily reflecting strong service sector spending. Fed stance: Despite the fiscal stimulus, don't expect the Federal Reserve to change its stance immediately. The Fed is expected to keep interest rates unchanged at the January 28 FOMC meeting. Powell will likely emphasize "solid" economic growth, a cooling but still healthy labor market, while noting that inflation remains slightly elevated due to tariff factors. Fiscal deficit: The report predicts the US fiscal deficit will remain just below 6% of GDP in the coming years (5.8% in 2026), meaning fiscal policy will continue to provide a moderate boost to the economy.
The market is about to experience a refund-driven liquidity pulse. While this may mask signs of economic weakness in the short term, investors should clearly recognize that this is more of a "one-time" fiscal policy benefit rather than a recovery in endogenous growth. Focus on consumer stocks favored by high-income groups, while remaining cautious about ongoing pressure on shipping and trade-related sectors.
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