New data shows that the so-called K-shaped economy is becoming more pronounced.
In the aftermath of the coronavirus pandemic, K has been used to describe Americans’ diverse economic experiences. While high-income households are getting better and better, low-income households are falling further behind.
A new report from credit bureau TransUnion finds that while credit conditions are improving for most consumers, others are struggling in the face of higher costs and increased debt burdens.
The K-shaped economy is “alive and well,” said Michele Ranelli, vice president and head of U.S. research and consulting at TransUnion.
Over the past few years, more and more borrowers have become superprime, with credit scores of 780 or higher, or subprime, with credit scores below 600, TransUnion said. This dynamic is leading to an increasingly bifurcated consumer economy.
“The top end of the K is very strong,” Ranelli said. “Superprime is stable and resilient,” she says. “Once you’re in that group, there’s not a lot of foot traffic.”
Raneri said that in the lowest-tier K areas, low-income households are “struggling even more than they were before.” Consumers in this group have increased debt-to-income ratios and are carrying more debt, a sign of potential financial strain, TransUnion found.
“Everyone has experienced the effects of inflation to some degree equally, and no one has been spared from it,” Ranelli said. But when you consider debt levels relative to income, “we see that lower-income consumers are being hit harder,” she added.
People who are struggling to make ends meet often turn to credit cards to fill the gap. According to research from TransUnion, the average credit card balance per consumer is now $6,519, an increase of 2.3% from a year ago.
Consumer spending is now primarily driven by high-income households, those with annual incomes of $125,000 or more, according to a new blog post published Friday by the New York Fed.
The highest earners also spend a disproportionately larger share of their spending on luxury goods, fine dining, and entertainment than any other group.
The beginning of K
New York Fed researchers found that economic conditions diverged markedly in 2023 “just after many of the pandemic-era subsidies for low- and moderate-income households expired.”
Since then, researchers have found that low-income households have been hit hardest by persistent inflation, while the wealth of those at the top has increased the fastest.
Although consumer spending and credit card balances remain relatively healthy overall, “reliance on a single segment of the economy has important implications for spending growth and vulnerability, as well as economic fragility and policy,” the New York Fed researchers wrote.
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