The K-shaped economy, widely touted in the financial press, is the latest expression of wealth inequality. The American economy is experiencing a widening gap between the highest earners and wealthiest corporations, who are spending and expanding their wealth, and the lowest-income households and family businesses, who are struggling to pay their bills day to day.
Following the second short-term interest rate cut on October 29, Federal Reserve Chair Jerome Powell said: “A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it.”
He cited the Federal Reserve’s current concerns regarding inflation, employment, rising subprime loan defaults, layoffs and a “bifurcated economy.”
“If you listen to earnings calls or reports from large consumer-facing public companies, many, many of them say that there is a bifurcated economy there and that consumers at the bottom end are struggling and buying less and switching to lower-cost products, but that at the top, people are spending with greater income and wealth,” Powell said.
This, in a nutshell, is the K-shaped economy.
Can a divided US economy avoid a recession? And how can an economy that’s warming on one side and cold on the other meet the needs of the millions of people in the middle?
Read more: K-Shaped Economy Reflected in Credit Scores
The K-shaped economy is characterized by robust growth, expanding wealth, and a vibrant economy in the arms at the top of the K.
The legs of the K are where low-income people and small businesses continue to struggle.
Cristian deRitis, senior director and deputy chief economist at Moody’s Analytics, said the gap between the two is growing.
“The top 10% of households account for about half of all spending in the U.S. economy, so it kind of illustrates the inequality, not just of income, but of spending, that’s happening in the economy,” deRitis told Yahoo Finance.
In 2019, the share of spending by the richest 10% of households was 44.6%. However, the wealth gap goes beyond consumer spending.
“When we think about businesses and the stock market or we think about the labor market, some industries are hiring, some industries are laying off,” deRitis added. “So I see that K shape not just in the consumer – I think that’s where it gets a lot of attention – but it’s actually in many different parts of the economy where you can see that kind of bifurcation of activity.”
DeRitis believes the growing divide between the haves and have-nots dates back to the pandemic stimulus relief.
“The bottom households, in particular, received quite a bit of support that helped them get their finances in order,” deRitis said. “Default rates went down a lot. But now that the money is gone because inflation has been high, the labor market is slowing down, so there isn’t as much wage growth.”
Meanwhile, the top of the K, the wealthiest households and corporations, have benefited from a rising stock market and appreciating asset prices, including housing and cryptocurrencies.
While the stock market has hit record highs recently, it has been supported by the largest companies. This increases the wealth of the very rich, who have the largest individual holdings in stocks.
During Ford’s (F) latest earnings call, the company highlighted earnings driven by its top-of-the-line models, including the F-150, Bronco, Explorer and Expedition. “The all-new Expedition is red hot, gaining more than three points of segment share, with 75% of customers choosing high-end models like the Tremor,” the company said.
Delta Air Lines’ (DAL) premium-priced seats and iPhone 17 Pro smartphones that top $1,000 are other examples.
Chipotle (CMG) cut its full-year sales outlook for the third straight quarter, with CEO Scott Boatwright citing “persistent macroeconomic pressures” and poorer customers who don’t eat there as often.
Read more: The Chipotle Indicator: Is the Economy on the Verge of a Recession or Not?
In an analysis, Torsten Sløk, chief economist at Apollo, reveals that earnings expectations for 2026 have risen for Magnificent 7 stocks and fallen for the rest of the S&P 500 (^GSPC). (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
Anthony Chan, a former economist at the Federal Reserve and JPMorgan Chase, told Yahoo Finance that a K-shaped economic recovery is the latest incarnation of wealth inequality.
“This shows that inequality is getting so bad that it’s now impacting how the economy works. All you have to do is look at the anecdotal evidence about food pantries. More and more people are visiting food pantries. Why? Because people on the lower end are struggling.”
He also cites the popularity of buy now, pay later.
“I can assure you that the top 1% (the top 10% of people) are not interested in buy now and pay later. They buy it and just pay for it and don’t even think about it. But we are actually seeing some of the lower-income people buying groceries in supermarkets with the Buy now, pay later option.”
Read more: Buy now, pay later vs. credit cards: which should you use on your next purchase?
Chan is not quick to predict a recession. He noted that the Atlanta Federal Reserve projects 4% growth in the third quarter, after the 3.8% increase in the second quarter.
“I have never seen a recession in my entire life where there was 3.8% growth in one quarter and 4% growth in the next quarter,” Chan added. “Potential growth is about 2%, maybe a little less than that. So if growth is twice as fast as potential economic growth, I really think it’s almost economically negligent to say we’re entering or close to being in a recession.”
However, Chan and deRitis noted that there are wild cards in the economic forecast, and deRitis mentioned one in particular.
“I suspect that investments in artificial intelligence are perhaps getting ahead of themselves and may not live up to the extreme expectations that we have,” deRitis said. “There is likely to be some sort of correction in the stock market in the future as investors become more familiar with the reality.”
In a prolonged bear market scenario, the top tier of wealthy households could cut their spending, and the handful of big tech companies that have led stock gains would be hurt.
“If we have a setback in AI, absolutely, it could be a recession,” he added.
Read more: What is a recession?
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4. Open a home equity line of credit (HELOC) if you need money for a large purchase.