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Why is the shape of the economy being debated again?

The term K-shaped economy has long been used in the U.S. to describe a post-pandemic recovery that has not benefited all income groups equally. But recent data on wage growth, tax policy and spending trends has sparked a debate over whether the economy now looks more like a C or an E rather than a K.

For economists, this is more than a conceptual label. The spending gap between lower- and higher-income consumers directly affects sales outlooks for retailers, hotels and consumer staples companies, as well as monetary policy and the cost-of-living debate during election periods. Names such as Joel Mokyr and Don Rissmiller have noted that it is unusual for this kind of letter-based metaphor to remain in the spotlight years after a recession.

Who is making the case for a C-shaped economy?

Scott Bessent said in his remarks this month that the K-shaped economy was fading and that a C shape was emerging, with lower-income households gaining ground. The U.S. Treasury Secretary pointed to wage gains among lower-income workers and President Donald Trump's policies that exempt tip income and overtime pay from taxes.

Corporate leaders have offered a similar reading. Hilton Worldwide CEO Christopher Nassetta said the outlook in the middle- and upper-middle-income segments had shifted from negative to growth, with growth reaching as much as 6% in some areas. Wyndham Hotels & Resorts also said confidence in the buying power of middle-income consumers was recovering.

Do the data confirm that the K-shaped divide is over?

Not everyone is convinced by the upbeat narrative. Anthony Chan, former chief economist at JPMorgan, argues that the war between the U.S. and Iran is hitting lower-income households harder through energy prices. According to Chan, the risk that higher gasoline prices keep inflation elevated could limit any gains from tax refunds or steps aimed at improving housing affordability.

Consumer sentiment is also pointing to caution. According to the University of Michigan survey, consumer confidence fell 11% in August from a year earlier and remained near the lows seen at the start of the year. Joanne Hsu, who oversees the survey, said this month that confidence losses were more pronounced among lower- and middle-income groups.

Company updates also suggest the divide has not fully disappeared. Executives at Colgate-Palmolive, Lowe's and Constellation Brands said consumer spending still shows a K-shaped pattern. Researchers at the New York Fed said total credit card balances reached an almost record $1.26 trillion in the second quarter, a sign that many households are still living paycheck to paycheck.

What would an E-shaped scenario mean for markets?

Some institutions have recently seen signs of convergence in the economy. A Richmond Fed report released last month said income growth from 2021-2023 did not show a clear K-shaped split across income groups, although spending data pointed to a sharper break. The Bank of America Institute said the gap in credit card spending between the highest-income group and other income brackets began to narrow in May this year.

Other economists, however, argue that the economy now looks more like an E. This view holds that low-, middle- and high-income groups are neither diverging further nor fully converging, but moving along parallel yet unequal paths. Michael Eisenband of FTI Consulting and Heather Long of Navy Federal Credit Union say the picture is better described by an E, especially if the middle class is only just managing to stay afloat.

  • Energy costs and basic living expenses continue to weigh on lower-income households.
  • Signs of recovery are appearing in the middle class, but consumer confidence remains weak.
  • The spending advantage of higher-income households has narrowed, but it has not disappeared completely.
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