The term “K-shaped economy” is popping up everywhere from Wall Street earnings calls to Fed speeches, with leaders (and everyone else) trying to make sense of a recovery moving in two opposite directions at once.
The top half of the “K” represents higher-income Americans whose wealth and portfolios keep rising; the bottom half reflects lower-income households facing slower wage growth, pricier essentials, and thinner financial cushions. It’s become the catchall explanation for an economy that looks strong on paper yet continues to feel shaky for millions of people.
After a COVID-era stretch when lower-wage workers saw the fastest pay gains, inflation and cooling hiring have flipped the script. Real wage growth for the bottom quarter of workers has slumped to 1.5%, according to the Minneapolis Fed, compared to 2.4% for the highest earners. Consumer spending is widening along similar lines: Bank of America found that higher-income households boosted spending by 2.7% in October, while lower-income groups only increased spending by 0.7% — and took on more credit card debt to do it.
Companies are responding in lockstep: execs at Coca-Cola, Delta, and Best Buy all say they’re seeing sharp divergence in customer behavior, selling more premium products to bougie shoppers while offering smaller, cheaper options for bargain hunters. But economists warn that an economy carried by the top end can become fragile. If middle- and lower-income households continue to cut spending, consumer-dependent companies will also feel the pain.
