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If you squint at enough data about the US economy right now, on income and spending and consumer confidence, there's a shape that starts to emerge, a letter, the letter K.
A K shaped economy is the result of a bifurcation and consumer confidence.
Economist Peter Atwater is responsible for popularizing the idea of a K shaped economy in twenty twenty during the global COVID pandemic.
We should have hoped for a V shaped recovery coming out of COVID, where all ships rose together, even a U shaped recovery where there's a delay in the recovery but ultimately it all rises together.
But we didn't get a V. We didn't get a U. We didn't even get an L where things stayed bad for everyone. Instead we got a K.
So, if you think about the letter K, it has a vertical line, obviously, and then two lines kind of diverging from the center of that vertical line.
That's Bloomberg reporter Katerina Sariva, and the divergence she and Peter are talking about is a split in the paths of Americans at the top and bottom of the US economy with the fortunes of those at the top rising and those at the bottom getting worse. That's how the economy looked during the recovery from COVID, and it's how it looks again now.
Today, fast forward to twenty twenty five. We're again talking about the K shape because we are seeing kind of a return to that. We're seeing consumer spending really slow down for folks at the lower ends of the income spectrum, while rich folks are doing really well.
And this time around, the two sides of that K are getting even farther apart. I'm Sarah Holder, and this is the big take from Bloomberg News today on the show A Tale of Two Economies. Why the gap between America's wealthiest and everyone else is widening, how it's showing up in company earnings reports, and what the K shape means for the country's overall financial health. Economist Peter Atwater
studies confidence and how it impacts consumers decision making. That's what originally drove him to recognize this K shaped pattern.
Early on in COVID, I saw as white collar workers their confidence immediately popped when they could work from home. On the other hand, blue collar workers factory workers, hospital workers. Their confidence kept deteriorating. So based on that divergence and confidence, I expected that the economy would follow.
And Bloomberg's Katarina Sariva says it did follow.
You had one group of people that were kind of in the upper echelons of the economy, so think like high income earners, people with a lot of wealth, and those people were really doing well. The stock market was rising a lot already by the end of twenty twenty, So people with wealth and people with jobs where they could work from home, for example, we're doing really well. Now. The other half of the economy really wasn't. We still had like eleven million people unemployed at the end of
twenty twenty. Unemployment rate was above six percent, So for anyone who didn't have stocks, for example, maybe didn't own a home, things were not going great.
Eventually, the government rolled out stimulus programs, lockdowns lifted, and companies started rehiring workers again.
And that is especially benefited the lower income folks because those were the people that had the most impact from the pandemic layoffs. So when you had companies trying to hire them again. For a lot of these service industry jobs, that had to shutter in the pandemic, you saw big wage gains. That has changed now, and in fact, it has refersed The largest wage increases right now are for the highest income earners.
Those high earners are also the people who tend to be making the most from the stock market.
It's been just surging this year, so that obviously gives people confidence. There's research showing that each additional dollar of stock market wealth raises consumption by about five to fifteen cents. And then not just the stock market, you know, you also have to look at wealth that's been created through home ownership, again, something that disproportionately impacts wealthier people, and home prices have just increased so much over the past
five years. That also helps me people feel like they can spend more.
Would you say that there's a capital K shaped economy and then there's other lowercase shaped economy sort of playing out in other sectors like the housing market.
Yeah.
Absolutely, We're really in a moment where it's becoming a really popular metaphor, I think, and it's being used across a variety of industries. So yeah, you can look at home buying where things are going really well for that upper part of the market because again, folks are able to sell their homes and are able to have more wealth through the stock market, so they can go buy a bigger home and not as much at the lower edges.
I've heard it talked about. For example, if you're looking at how airlines are performing right now, so you look at the legacy carriers like the big American airlines Delta, they're doing really well, and they're reporting that high end consumers business travelers for example, are spending people are flying internationally, even if maybe not as much domestically, right, so they're
still seeing a lot of revenue from that. And then some of the smaller like the low cost carriers in some cases like Spirit filing for bankruptcy, really not doing well. So it's an interesting dynamic that I think is playing out in a lot of different areas.
You can see a similar trend in the food and hospitality industries too.
So you have some of these fast casual places that are a bit more expensive, right, like not the cheapest option out there, really not doing well. And then restaurant chains like McDonald's reporting that they're doing okay because they're getting a lot of these consumers that would be going to somewhere like Chipotle or Sweet Green for example, now kind of trading down to something like a McDonald's. You're also definitely hearing corporations talk about how their luxury consumers
are really supporting their growth. Hearing this from the hotel chains, also hearing this from Ethan Allen, the furniture company any that one the higher higher end, they're still seeing a robust consumption there, and then that's supporting kind of the rest of their business.
Businesses have found a way to cater to this divergence.
Economist Peter Atwater again.
Meanwhile, for those at the bottom, it's becoming a monthly, if not now weekly exercise and juggling their finances.
The Atlanta Fed has reported that some shoppers are shifting to liquid or powder laundry detergent instead of using pre portion pots so they can ration it out in smaller amounts. The grocery chain Kroger has found that lower and middle income shoppers are using more coupons and buying cheaper brands.
People are trying to find ways to spend less. But the thing about a K shaped economy is that even as the top and bottom are getting further apart, looking at the big picture can be misleading because when it comes to overall spending or overall growth, the economy looks like it's doing okay.
We had stronger economic growth this year than most people thought we would. We have a pretty low unemployment rate still right like four point three percent. Things still look really good. It's just when you look under the hood, you realize that it's really being driven by a small number of people. This is important because the US economy, we're a consumer economy. Two thirds of economic activity in
the US is driven by the consumer. So when you start to concentrate that in an increasingly smaller number of people, it just means you have a more fragile system.
In the early nineties, the top ten percent of earners accounted for about thirty five percent of the country's consumer spending. Today they account for nearly fifty percent. And as the economy gets more top heavy, it also becomes more fragile. What are the consequences that's after the break. We've talked a lot about how the current economy is bifurcating, splitting with the wealthy and everyone else on separate tracks, moving
away from each other. The letter K but economist Peter Atwater has another image to consider, a Jenga tower.
I feel like the blocks in the Jenga tower, particularly at the very foundation, are being pulled away at the top. So much is happening financially, and that would be okay if there was some level of robustness at the bottom, that if the K really represented strength at the top and the bottom. But what we have now is all of this oversized activity at the very top. Meanwhile, bel it is becoming more and more fragile.
In October, FED chair Jerome Powell said that this bifurcated economy is something he's watching very very carefully, and Peter's watching closely too. He believes that if something causes the wealthiest consumers to pull back on spending, say a big decline in the stock market, it could send the jungle blocks toppling.
We think of these markets as being representative of strength, and as a researcher, what I know is that invincible markets are incredibly fragile, and as confidence falls, scrutiny will intensify.
One area that Peter thinks is especially vulnerable to scrutiny right now, AI I think.
What it would take to topple is a relatively small event. The challenge is the confidence in AI. Individuals will challenge the benefits of all of this AI abstraction and demand immediate, tangible results that it does not appear that it can yet deliver.
So what would it take to bolster the Jenga Towers foundations and to start narrowing the diverging parts of the K It's no easy task. The government shutdown has put new immediate strains on lower income Americans, withn benefits on Holt, and longer term fixes haven't found much political momentum, at least at the federal.
Level, things like reforming the tax code, looking at things like the capital gains tax, which really is very low in this country, right, looking at things like the payroll tax, estate tax, corporate tax rates. Right, there's a lot of ways that you could change tax lat to make it more progressive. I think economists would argue, I don't know right now how widespread of support there is for doing
things like that at the federal level. Right. We just had a massive tax reform package go through that in some ways was kind of the opposite of what we're talking about, that was perhaps more helpful to higher income and corporations.
Is a K shaped economy just a euphemism for an unequal economy? Is the KY just measuring inequality? Yeah?
Absolutely. We talked to some economists who noted that inequality it's not new for the US economy, right We've had widening inequality for decades here. But widening inequality when it gets to levels like what we're seeing right now, tends to not be good for an economy because what it can mean is that you can actually have slower growth, and it can even lead to things like social unrest.
It's not just inequality in terms of an economic sense. This is inequality in multiple dimensions at once. Because for those at the bottom, they have scarcity in education, in healthcare, in childcare, in job opportunity. They have what I call stacked vulnerability, where the economic piece is just one more thing.
And at the same time, those at the top have over abundance in everything, power, money, influence, and so it's become very difficult for those at the bottom to ignore what's happening around them.
This is the Big Take from Bloomberg News. I'm Sarah Holder. To get more from the Big Take and unlimited access to all of Bloomberg dot com. Subscribe today at Bloomberg dot com Slash podcast offer. If you liked this episode, make sure to follow and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow