A giant neon sign in the shape of the letter K is flashing across the US economy. This has become the talk of Wall Street and Main Street over the last several weeks, with economic observers noticing a divergence across many aspects of the marketplace, from fast-food chains to car dealerships. Can the country reverse the bifurcation immediately, or will time be the remedy?
Give Me a K!
Watching CNBC, you will notice the talking heads, monetary policymakers, and executives repeatedly talking about the K-shaped economy. This is a situation whereby different segments of the economy are growing at sharply divergent rates. The upper arm, representing the high-income category, continues to thrive, while the lower arm struggles to stay afloat.
Some may dismiss the conversation as purely speculative. Indeed, it is challenging to assign negative assessments of current economic conditions, considering growth is 4%, tariff-driven inflation has been modest, and the labor market remains intact. However, a treasure trove of data and a plethora of actions in Corporate America suggest that the concerns are justified.
This past summer, top economist Mark Zandi essentially set the stage for today's national conversation, warning that the top 20% are driving the economy, while the bottom 80% are struggling to keep up. "The data also show that the U.S. economy is being largely powered by the well-to-do. As long as they keep spending, the economy should avoid recession, but if they turn more cautious, for whatever reason, the economy has a big problem," Zandi wrote in a Sept. 16 post on X.
A chorus of Federal Reserve officials has alluded to the two-speed economy, where the rich are spending, allowing the consumption-driven US economy to continue expanding. Fed Chair Jerome Powell, speaking to reporters at last month’s post-meeting press conference, noted that high-income consumers are opening their wallets because of the record-breaking stock market.
In the University of Michigan’s preliminary November Consumer Sentiment Index, respondents earning more than $75,000 maintained an upbeat view of the US economy. Those earning below this income threshold? They held a more pessimistic opinion of what is presently unfolding.
Harkening back to the previous administration, some may view this as the so-called “vibecession.” However, while there has generally been a disconnect between what people say and do, the latest batch of numbers suggests that some may be apprehensive about inserting, swiping, and tapping. Now, due to the six-week-old government shutdown, it has been difficult to assess the current state of the economy. Experts can only depend on private-sector alternatives to understand the trends forming in a $30 trillion economic landscape.
The Bank of America Institute, for example, recently touched upon “the tale of two wallets.” In September, higher household income terciles registered a 2.6% year-over-year increase in spending. Low-income households registered a tepid 0.6% increase.
Procter & Gamble is seeing wealthier shoppers buying big pack sizes, while lower-income customers are exhausting their pantries before heading back to the stores. McDonald’s has expanded its value menu as the company noticed the bifurcation. Delta Air Lines stated in its recent earnings call that revenues from premium offerings are expected to outpace those from the coach cabin next year. High-income motorists are purchasing automobiles, with the average price recently topping $50,000.
Patience, Please
In economics, you typically have three other letters to describe an economy: L-shaped (extended stagnation), V-shaped (fast and uniform climate), and U-shaped (slow recovery). One letter that might be a more suitable descriptor is a W-shaped environment, at least when it comes to fluctuations in income and household situations.
A common misconception is that income terciles are persistently static. In other words, there is a predestined economy where those belonging to the bottom 20% will remain entrenched, discounting income mobility and the volatility of households.
Every couple of years or so, the terrific folks at the American Enterprise Institute will publish a chart assessing the percent shares of US households by total money income in constant [insert year here] dollars, from 1967 to the present day. The numbers routinely show that, yes, the middle class is disappearing, but that is only because those people are transitioning to a higher income (accounting for inflation). Those in the low-income category? They, too, are shrinking because they are moving up the income ladder.
Suffice it to say, it takes time for economic gains to filter their way through the economy. Of course, it is not a guarantee that this trend will continue, with many fearful of the coming artificial intelligence (AI) age. However, if history repeats itself and the new technology is a net positive for the nation, meaning the wealth pie is larger for everyone, then the progression from low- to middle- to high-income status should persist.
Indeed, as the United States observed over the last few years, there are hiccups along the way. As any great investor understands, it is challenging to bet against America when these long-term numbers unfold as they do.
Ye Who Enter
Ultimately, if the rich stop spending, is America doomed? Timing is everything.
The endgame for the current administration’s trade agenda is a reversal of positions on the world stage: The American people are producing, while the rest of the world is consuming. Skepticism is warranted, considering that not too many countries are generating enough wealth to buy Ford automobiles or Made in America iPhones. Even if the White House is successful, ensuring low- and middle-income households back home are prepared to step up their consumption endeavors when the affluent cease opening their pocketbooks will be difficult.
For now, if the K-shaped economy is accurate, it is no wonder that the likes of Zohran Mamdani are popular among young people. If the youth cannot benefit from the system, then why not burn it to the ground through socialist means?
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