From business executives to Wall Street analysts to Federal Reserve officials, references to the “K-shaped economy” are growing rapidly.
So what does this mean? Simply put, the top half of the K refers to rising incomes and wealth among higher-income Americans, while the bottom half refers to lower-income households struggling with weak income growth and rising prices.
A big reason the term appears so frequently is that it helps explain an unusually chaotic and complex period in the U.S. economy. grow appear solidnot yet recruiting sluggish and unemployment rate checked. Overall consumer spending is still growing, but Americans Not very confident. Artificial intelligence-related data center construction is soaring, while factories are laying off workers and home sales are weak. Although wage growth is slowing, stocks are still hovering near record highs.
It also reflects ongoing concerns about affordability, which is more important for low- and middle-income households. Persistent inflation is back in the political spotlight after voter anger over expensive rent, groceries and imported goods helped Democrats win several high-profile elections last month.
“Those at the bottom are suffering the cumulative effects of rising prices,” said Peter Atwater, an economics professor at the College of William and Mary in Virginia. “At the same time, those at the top are benefiting from the cumulative effects of asset inflation.”
Here are some things to know about the K-shaped economy:
Not L, U or V
Atwater actually popularized the label “K-shaped economy” during the epidemic after seeing it appear on social media. Other economists are discussing different letters describing how the 2020 COVID-19 recession might unfold: Will it be a V-shaped recovery, meaning a sharp decline followed by a rapid rebound? Or will it be U-shaped, implying a more gradual rebound? Or, worse, an L-shape: a recession followed by secular stagnation.
“It’s kind of like a land grab for letters,” Atwater said. “To me, the most meaningful letter is K.”
At the time, it captured the divergent fortunes between white-collar professionals who remained employed and those working from home amid rising stock prices, even as mass layoffs at factories, restaurants and entertainment venues drove the unemployment rate to nearly 15%.
Inequality still exists
After the pandemic, inequality reversed somewhat as companies gave blue-collar workers big pay raises as the economy reopened and demand surged. Many companies — restaurants, hotels, entertainment venues — are struggling with staffing shortages and looking to ramp up hiring quickly. Low-income workers have seen higher wage increases than higher-income workers.
Research from the Federal Reserve Bank of Minneapolis shows wages for workers in the bottom quartile will grow at an annual rate of 3.9%, adjusted for inflation, in 2023 and 2024, outstripping the 3.1% gain at the top.
“We had a two-year period where the bottom was catching up and talk of the K-shape disappeared,” said TSLombard economist Dario Perkins. “Since then, the economy has cooled off again,” he added, bringing back the K-shape reference.
This year, however, inflation-adjusted wage growth has weakened as employment has declined, with the decline more pronounced among lower-income Americans. The Minneapolis Fed found that their annual wage growth has plummeted to just 1.5%, slower than the 2.4% growth rate for workers in their highest-earning quarters.
Slowing income growth has reduced the spending power of many low-income workers. Based on credit and debit card customer data, Bank of America The study found that spending by high-income households increased by 2.7% in October compared with the same period last year, while spending by low-income households increased by only 0.7%.
and the Federal Reserve Bank of Boston. Study in August The study found that consumer spending in recent years has been driven by wealthy households, while lower- and middle-income Americans have accumulated more credit card debt while spending less.
Businesses note
Corporate executives are paying attention to the issue and, in some cases, are explicitly adapting their operations to deal with it. They are looking for ways to sell more of their high-priced goods to the wealthy, while reducing package sizes and taking other steps to target struggling consumers.
Henrique Braun, Chief Operating Officer Coca ColaFor example, in late October, it said that the company was pursuing “affordability” and “high-end”. The company generates more revenue from high-end products such as Smartwater and Fairlife filtered milk brands, while also launching mini cans for those looking to spend less.
“We continue to see disparities in spending across income groups,” Braun said on a conference call with analysts last month. “Pressures on lower- and middle-income consumers remain.”
Sales of first- and business-class tickets have been driving revenue and profit growth Delta Air Lineswhose CEO Ed Bastian October sayswhile lower-end consumers “have clearly been struggling.”
and best buy CEO Corey Barry Tuesday It states that the top 40% of consumers in the United States drive two-thirds of consumption.
The remaining 60% are focused on getting the best deal and are more reliant on a healthy job market, she said.
She added: “One of the things we’re watching closely is how employment continues to develop, particularly for those on higher incomes.”
AI comes into play
Massive investments in data centers and computing power have also fueled the K-shaped economy, boosting the share prices of the so-called “seven” companies competing to build AI infrastructure. But so far, it hasn’t created many jobs or boosted incomes for those who don’t own stocks.
“What we’re seeing at the top is a self-sustaining economy … somewhere between artificial intelligence, the stock market and the experience of the wealthy,” Atwater said. “And it’s basically contained. It’s not going to flow to the bottom.”
Driven by huge earnings from companies like Google, Amazon, NVIDIAand MicrosoftThe stock market is up nearly 15% this year. But the richest 10% of Americans own about 87% of the stock market, according to the Federal Reserve. The poorest 50% own only 1.1%.
K type has worries
Many economists worry that an economy driven primarily by the wealthiest people is unsustainable. Perkins pointed out that if layoffs worsen and unemployment rises, low- and middle-income Americans may significantly cut spending. The revenue of a company like this apple Amazon will fall. Advertising revenue powers companies like Google and Facebook parent Yuanwhich typically plummets during economic downturns.
Such a cycle could even force the “Mag 7” to withdraw investment in artificial intelligence, leading the economy into recession, he said.
“So what you’re saying is that the bottom of the K essentially pulled the top down,” he added.
However, Perkins thinks a different path is more likely: Under the Trump administration’s budget law, many American households will receive larger tax refunds early next year. Trump is likely to appoint a new Fed chairman next May who will be more inclined to cut interest rates. Lower borrowing costs could accelerate economic growth and wage growth, but could also increase inflation.
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AP Retail Writer Anne D’Innocencio in New York contributed to this report.