WASHINGTON (AP) – References to the “K-shaped economy” are rapidly spreading from corporate executives to Wall Street analysts to the Federal Reserve.
So what does that mean? Simply put, the top of K refers to higher-income Americans who are experiencing increases in income and wealth, while the bottom refers to lower-income households who are struggling with slowing income growth and rising prices.
A big reason this term comes up so often is because it helps explain an unusually turbulent and complex period in the U.S. economy. growth Looks solidstill hiring dull and the unemployment rate It was exciting. Although overall consumer spending is still increasing, Americans lose confidence. As factories continue to lay off workers and housing sales are sluggish, construction of AI-related data centers is rapidly increasing. And even as wage growth slows, the stock market remains near record highs.
It also captures continuing concerns about affordability, which are a greater concern for middle- and low-income households. Persistent inflation is back in the political spotlight, with Democratic victories in several high-profile elections last month helped by voter anger over high rents, groceries and imported goods.
“People at the bottom are living with the cumulative effects of price inflation,” said Peter Atwater, an economics professor at the College of William and Mary in Virginia. “At the same time, those at the top benefit from the cumulative effects of asset inflation.”
Here’s what you need to know about the K-shaped economy.
Not L, U, V
Atwater actually popularized the “K-shaped economy” label after seeing it pop up on social media during the pandemic. Other economists were discussing various documents that explain how the 2020 coronavirus recession will play out. In other words, will we see a V-shaped recovery, a sharp drop followed by a rapid recovery? Or will it be U-shaped, a more gradual rebound? Even worse, it’s L-shaped: a recession followed by a long period of stagnation.
“There was a kind of land grab of letters,” Atwater said. “The letter that meant the most to me was K.”
At the time, it captured the difference in fortunes between white-collar professionals still employed and those working from home as stock prices rose even as massive layoffs in factories, restaurants and entertainment venues pushed the unemployment rate to nearly 15%.
inequality continues
As the economy reopened and demand surged after the pandemic, inequality reversed somewhat as companies offered big raises to blue-collar workers. Many businesses, including restaurants, hotels, and entertainment venues, faced staff shortages and sought to hire quickly. Low-income workers experienced larger wage increases than higher-wage workers.
Inflation-adjusted wages for workers in the bottom quartile rose 3.9% annually in 2023 and 2024, outpacing the 3.1% increase for the top quartile, according to a study by the Federal Reserve Bank of Minneapolis.
“There were two years where it seemed like the bottom had caught up with us and the K-shaped story was gone,” said Dario Perkins, an economist at TS Lombard. “And since then, the economy has cooled down again,” he added, bringing back the K-shaped reference.
But this year, inflation-adjusted wage growth has slowed as employment has declined, and the drop has been more pronounced among lower-income Americans. Their wage growth has plummeted to just 1.5% a year, lower than the 2.4% rate for the highest-income workers, according to a study by the Minneapolis Fed.
Slower income growth has reduced the spending capacity of many low-income workers. Based on data from credit and debit card customers, Bank of America found that spending among higher-income households increased by 2.7% in October compared to a year ago, while spending among lower-income households was just 0.7%.
and the Federal Reserve Bank of Boston study in august While consumer spending in recent years has been driven by wealthy households, low- and middle-income Americans have been found to be taking on more credit card debt even as they spend less.
Companies pay attention
Business leaders are taking note and, in some cases, explicitly adjusting their businesses to take it into account. They are looking at ways to sell more expensive products to wealthy customers while taking other steps to target struggling consumers, such as reducing package sizes.
For example, Coca-Cola Chief Operating Officer Enrique Braun said in late October that the company is pursuing both “affordability” and “premiumization.” The company generates much of its revenue from premium products such as its Smart Water and Fairlife filtered milk brands, but it’s also introduced mini cans for those looking to spend less.
“We continue to see a disparity in spending across income groups,” Brown said on a conference call with analysts last month. “Pressures on middle- and low-income consumers remain.”
Delta Air Lines CEO Ed Bastian says sales of first and business class tickets are driving revenue and profits. said in octoberMeanwhile, lower-end consumers are “clearly struggling.”
and Best Buy CEO Corie Barry. on tuesday The top 40% of all U.S. consumers say they drive two-thirds of all spending.
The remaining 60% are focused on getting the best deal and are highly dependent on a healthy job market, he said.
“One of the things we are watching closely is how employment continues to evolve, especially for people who are living paycheck to paycheck,” she added.
AI plays a role
Huge investments in data centers and computing power have also boosted the stock prices of the so-called “Magnificent Seven” companies competing to build AI infrastructure, contributing to the K-shaped economy. But so far, it hasn’t created many jobs or increased incomes for people who don’t own stocks.
“What we’re seeing at the top is a kind of self-contained economy between AI, the stock market, and the wealth experience,” Atwater said. “And it’s largely contained. It doesn’t drain to the bottom.”
The stock market is up nearly 15% this year, driven by big gains for companies like Google, Amazon, Nvidia and Microsoft. But the richest 10% of Americans own about 87% of the stock market, according to Federal Reserve data. Only 1.1% is owned by the poorest 50%.
K-shape comes with concerns
Many economists worry that an economy driven primarily by the wealthy is not sustainable. If layoffs worsen and unemployment rises, middle- and low-income Americans could sharply cut back on spending, Perkins said. Revenues for companies like Apple and Amazon will decline. Advertising revenue, which powers companies like Google and Facebook parent company Meta, typically plummets during recessions.
Such a cycle could even force Mag7 to withdraw its AI investments and push the economy into recession, he said.
“So you’re talking about the bottom of the K essentially pulling down the top,” he added.
But Perkins sees another path as more likely. Many American households will receive even larger tax refunds early next year under the Trump administration’s budget law. And President Trump is likely to appoint a new Fed chair bent on lowering interest rates by next May. Lower borrowing costs could boost growth and wages, but they could also worsen inflation.
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AP Retail Writer Anne D’Innocenzio in New York contributed to this report.
