US Economic Viewpoint: K, so what? Implications of a K-shaped economy

Research evidence excerpt

US Economic Viewpoint: K, so what? Implications of a K-shaped economy

Executive Summary

In a previous report (K, but why? Five drivers of K-shaped spending), we showed how

consumer spending since late-’24/early-’25 became increasingly K-shaped, with higher-

income households driving activity amid widening divergence across income cohorts

(Exhibit 1). We documented five factors responsible for the K-shaped spending dynamics

– balance sheets, housing costs, the labor market, fiscal stimulus and the affordability

shock from higher gas prices.

Together, these left higher-income households supported by equity wealth, stable

housing costs and steadier labor outcomes, while lower-income households faced rising

rents, weaker job growth and higher debt burdens. Then in 2026, this divergence

widened further: higher-income spending received a larger boost from OBBBA-related

tax relief, while higher energy prices from the Iran shock, acting as a regressive tax

weighed more heavily on lower-income households, leaving the former better positioned

to absorb the hit.

In this report, we turn to the implications of this divergence. We first assess why K-

shaped dynamics matter for aggregate consumption outcomes, highlighting the outsized

share of higher-income households in overall spending. We then show how these K-

shaped dynamics help reconcile the disconnect between a cooling labor market and

resilient consumer spending we got last year. Also, we use the pandemic recovery to

learn about the current K-shaped cycle.

Finally, we consider what a more bifurcated economy means for policy. The K

complicates monetary calibration by making aggregate demand appear firmer than

underlying breadth would suggest, even as stress builds unevenly across households.