Rising gasoline prices may neutralize the boost from US fiscal stimulus to consumption

Overview

This issue of US Economics Weekly focuses on whether the US fiscal impulse can boost household consumption. The report notes that the tax refund season is nearing its end, and although total refunds and average refund amounts have risen year over year, they are at the low end of Morgan Stanley's prior expectations. At the same time, the Middle East conflict has pushed up oil and gasoline prices, potentially increasing household energy spending and thereby offsetting the improvement in disposable income brought by tax refunds. Based on tax refund, gasoline price, financial conditions, and GDP tracking data, the report maintains its previous downward revision to 2026 US growth.

Core views

The core view is that the fiscal stimulus from OBBBA-related tax refunds is being neutralized by rising gasoline prices. Total tax refunds are up 14.2% year over year and average refunds are up 11% year over year, but roughly 75% of refunds are usually distributed by mid-April, leaving limited room for catch-up later. If gasoline prices stay near the current $4.11 per gallon level, additional household gasoline spending will exceed the average increase in tax refunds. The report therefore argues that the fiscal impulse provides limited support to real consumption, while the oil price shock, changes in financial conditions, and inflation pressures together support a more cautious US economic outlook.

Analysis framework

The report uses a macro high-frequency data tracking approach, combining IRS tax refund data, BLS gasoline prices, household gasoline spending estimates, the Morgan Stanley Financial Conditions Index, GDP nowcasts, and the upcoming data calendar to assess the combined effects of fiscal stimulus, the oil price shock, and financial conditions on consumption, inflation, and growth.

Methodology notes

• Fiscal and consumption analysisTax refund and gasoline spending offset framework

  Compare the year-over-year increase in average tax refunds with the increase in annual household gasoline spending caused by higher gasoline prices.

  The report estimates that average household gasoline spending in 2025 was about $2,500; when the average gasoline price rises about 15% year over year to roughly $3.60 per gallon, the additional gasoline spending would offset the roughly $346 increase in the average tax refund.

• Financial conditions analysisFRB/US-based Financial Conditions Index

  Convert changes in asset prices into equivalent changes in the federal funds rate.

  The index includes the 10-year US Treasury yield, S&P 500 returns, BBB credit spreads, dollar valuation, and oil prices, and aggregates them based on growth elasticities from the FRB/US model.

• GDP trackingMorgan Stanley 1Q GDP tracking

  Assess 1Q real GDP by incorporating the rebound in government spending, changes in software prices, and seasonal distortions in consumer prices.

  The report argues that government output reverting to trend and falling software prices temporarily lift 1Q GDP, but higher consumer prices create a drag of a similar magnitude.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US consumption-related assets

  Tax refunds and gasoline prices jointly affect household disposable income and real consumption.

  Strengths

  Higher tax refunds year over year and still-strong employment data can help consumers smooth spending in the short term.

  Weaknesses

  Gasoline prices are above the offset threshold and may erode the consumption capacity provided by tax refunds.

  Comparison

  Compared with looking at tax refunds alone, adding gasoline prices leads to a more cautious view on consumption.

  Risks

  If oil prices continue to rise or the conflict persists, downside pressure on consumption may become more evident in coming months.

• US Treasuries

  The financial conditions index shows that the 10-year US Treasury yield is one of the main contributors to tighter financial conditions.

  Strengths

  If growth expectations are revised down, the long end of the curve may receive some support.

  Weaknesses

  Higher inflation forecasts and the oil price shock may limit the room for yields to decline.

  Comparison

  The report emphasizes the combined effect of rates, the dollar, oil prices, and credit spreads rather than a single rates variable.

  Risks

  If inflation expectations continue to rise, US Treasuries may face repricing pressure.

• US dollar

  Dollar appreciation has been one of the key drivers of the net tightening in financial conditions since February 28.

  Strengths

  Safe-haven demand and relative rate factors may support the dollar.

  Weaknesses

  The easing in financial conditions after the ceasefire may weaken some of the dollar's safe-haven support.

  Comparison

  The dollar's impact is incorporated into the financial conditions framework alongside rates, equities, oil prices, and credit spreads.

  Risks

  Changes in policy expectations or an easing of geopolitical conflict could reverse the dollar's contribution.

• Crude oil and gasoline

  Oil and gasoline prices are key variables in neutralizing the fiscal impulse and increasing inflation pressure.

  Strengths

  Geopolitical conflict and supply disruptions may support energy prices.

  Weaknesses

  If the conflict eases or demand weakens, energy prices may fall back.

  Comparison

  The report directly compares gasoline prices with the increase in tax refunds, highlighting their offsetting effect on consumer cash flow.

  Risks

  Sustained high oil prices would both suppress real consumption and push up inflation.

• US equities and credit assets

  Equity returns and BBB credit spreads are included in the financial conditions index and affect future economic activity.

  Strengths

  The easing in financial conditions after the ceasefire may improve the environment for risk assets.

  Weaknesses

  Lower growth, rising inflation, and the oil price shock may weigh on earnings expectations and credit risk appetite.

  Comparison

  The report argues that market pricing has partly done the Fed's tightening work, but this effect can shift quickly with risk sentiment.

  Risks

  If the Middle East conflict or inflation pressures recur, risk assets may come under pressure again.

Key data

• Total federal tax refunds$253 billionAs of April 10, 2026, up 14.2% year over year, an increase of about $32 billion.
• Average refund amount$3,642Up 11% year over year, about $346 higher per refund than in 2025.
• Tax refund distribution progressAbout 75%About 75% of refunds typically received during tax season have already been distributed by mid-April, implying limited time for a meaningful catch-up versus expectations later.
• Gasoline price offset threshold$3.60 per gallonIf the average gasoline price rises about 15% from the prior year, the increase in gasoline spending would offset the average increase in tax refunds.
• Current gasoline price$4.11 per gallonAbove the offset threshold, supporting the view that gasoline spending will weigh on consumption.
• 2026 real GDP forecast2.2%Morgan Stanley currently expects real GDP growth of 2.2% 4Q/4Q.
• 2026 personal consumption forecast1.7%Morgan Stanley currently expects personal consumption growth of 1.7% 4Q/4Q.
• Previous GDP downward revision0.4 percentage pointOn March 20, the 2026 4Q/4Q output growth forecast was revised down by 0.4 percentage point, of which 0.3 percentage point came from private consumption.
• Change in financial conditionsAbout +30bp, then eased by 42bpAfter the Middle East conflict, financial conditions tightened by an amount equivalent to about a 30bp increase in the federal funds rate; after the April 7 ceasefire announcement, they eased by 42bp.
• Effective tariff rateAbout 8.5%The estimated effective tariff rate on US imports in February 2026 was about 8.5%; the baseline tariff estimate is close to 11%.
• 1Q GDP tracking2.2%Morgan Stanley's 1Q GDP tracking remains at 2.2%; the Atlanta Fed is at 1.3%, and the NY Fed edged down from 2.4% to 2.3%.
• March retail sales forecastHeadline +1.2% m/m, ex-autos +1.4% m/mGas station sales are expected to surge 13.4% m/m due to higher gasoline prices, while control group sales are expected to rise 0.3% m/m.

Impact & implications

For asset allocation and macro positioning, the report's main implication is that the resilience of US consumption is being tested by energy prices, and the positive impact of fiscal stimulus on growth may be lower than previously expected. If gasoline prices remain high, real consumption and GDP growth may come under pressure, while inflation forecasts face upside risk. On financial conditions, market price changes have to some extent done the Fed's tightening work, but the ceasefire and improved risk sentiment may partially reverse that tightening.

Risks

• If gasoline prices remain above $3.60 per gallon, they may further offset the support that tax refunds provide to consumption.
• A prolonged or escalating Middle East conflict could push up oil prices and further tighten financial conditions.
• If subsequent tax refund distributions do not catch up materially, the strength of fiscal stimulus may come in below expectations.
• Rising inflation may limit the Fed's easing room and erode real income.
• Consumer confidence is at low levels; if it begins to weaken in tandem with actual spending, downside growth risks will increase.
• Uncertainty around tariff policy may affect import costs, core goods prices, and business investment.

What to watch

• March retail sales, especially control group sales, gas station sales, and restaurant sales.
• Whether subsequent IRS tax refund data moves from the current low end of expectations toward the middle of the 15%-25% expected range.
• Whether gasoline prices remain near $4.11 per gallon or fall back below $3.60 per gallon.
• Developments in the Middle East conflict and their impact on oil prices, the dollar, credit spreads, and equities.
• Revisions to the rebound in government spending, software prices, and consumer seasonality factors in 1Q GDP tracking.
• Whether initial jobless claims, continuing claims, and manufacturing PMI show weakening in labor or output after the oil price shock.
• Whether long-term inflation expectations and consumer confidence surveys continue to deteriorate.