From corporate executives to Wall Street analysts to Federal Reserve officials, references to the “K-shaped economy” are rapidly proliferating.
So what does it mean? Simply put, the upper part of the K refers to higher-income Americans seeing their incomes and wealth rise while the bottom part points to lower-income households struggling with weaker income gains and steep prices.
It also captures ongoing concerns around affordability, which is much more of a concern for middle and lower-income households. Persistent inflation has received renewed political attention after voter anger over costly rents, groceries, and imported goods helped Democrats win several high-profile elections last month.
“Those at the bottom are living with the cumulative impacts of price inflation,” said Peter Atwater, an economics professor at William & Mary in Virginia. “At the same time, those at the top are benefiting from the cumulative impact of asset inflation.”
Here are some things to know about the K-shaped economy:
Atwater actually popularized the label “K-shaped economy” during the pandemic after seeing it crop up on social media. Other economists were discussing different letters to describe how the COVID recession in 2020 could play out: Would it be a V-shaped recovery, meaning a sharp decline and then rapid bounce-back? Or would it be U-shaped, meaning a more gradual rebound? Or, worse, L-shaped: A recession followed by extended stagnation.
“There was sort of this land-grab for letters,” Atwater said. “To me the letter that made the most sense was K.”
Back then, it captured the differing fortunes between white-collar professionals still employed and working at home while stock prices rose, even as massive layoffs at factories, restaurants, and entertainment venues pushed unemployment to nearly 15%.
Inequality was somewhat reversed in the aftermath of the pandemic, when businesses offered large raises for blue collar workers as the economy reopened and demand surged. Many companies — restaurants, hotels, entertainment venues — were caught short-staffed and sought to rapidly increase hiring. Lower-income workers saw larger pay gains than higher-paid ones.
In 2023 and 2024, inflation-adjusted wages for the bottom quarter of workers rose at a yearly rate of 3.9%, outpacing the 3.1% gains for the top quarter, according to research by the Federal Reserve Bank of Minneapolis.
“We had that kind of two-year period where the bottom was catching up and that talk of the K-shape went away,” Dario Perkins, an economist at TSLombard, said. “And since then, the economy’s cooled down again,” he added, bringing back K-shape references.
This year, however, inflation-adjusted wage growth has weakened as hiring has fallen, with the drop more pronounced for lower-income Americans. Their wage growth has plunged to an annual rate of just 1.5%, the Minneapolis Fed found, below that of the highest earning quarter of workers at 2.4%.
Corporate executives are paying attention and in some cases explicitly adjusting their businesses to account for it. They are seeking ways to sell more high-priced items to the wealthy while also reducing package sizes and taking other steps to target struggling consumers.
“We continue to see divergency in spending between the income groups,” Braun said in a conference call with analysts last month. “The pressure on middle and low-end income consumers is still there.”
The remaining 60% are focused on getting the best deals and are more dependent on a healthy job market, she said.
“One of the things we’re watching closely is how does employment continue to evolve for particularly that cohort of people who are living more paycheck to paycheck,” she added.
The massive investment in data centers and computing power has also contributed to the K-shaped economy, by lifting share prices for the so-called “Magnificent 7” companies competing to build out AI Infrastructure. Yet so far it’s not creating many jobs or lifting incomes for those who don’t own stocks.
“What we see at the very top is an economy that is sort of self-contained … between AI, the stock market, the experiences of the wealthy,” Atwater said. “And it’s largely contained. It doesn’t flow through to the bottom.”
Such a cycle could even force the “Mag 7” to pull back on their AI investments and send the economy into recession, he said.
“Then you’re talking about the bottom of the K essentially pulling down the top,” he added.
Perkins, however, sees a different path as more likely: Many U.S. households will receive larger tax refunds early next year under the Trump administration’s budget law. And Trump will likely appoint a new Federal Reserve chair by next May who will be more inclined to cut interest rates. Lower borrowing costs could accelerate growth and wages, though it could also worsen inflation.
___
AP Retail Writer Anne D’Innocenzio in New York contributed to this report.
