Understanding the K-Shaped Recovery: How America's Economy is Dividing and What It Means for You

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The current state of the U.S. economy reveals a stark divide: prosperity for some, hardship for many.

This division resembles a K-shape, where one segment rises while the other declines.

On the ascending arm of this economic figure are those thriving. The top 10% of households in the U.S. are responsible for nearly half of all consumer expenditures, supported by unprecedented stock market gains. High earners are seeing the most significant increase in hourly wages, a shift from the pandemic period when lower-paid workers saw better growth, as noted by the Federal Reserve Bank of Atlanta.

Meanwhile, grocery prices are surging, with items like beef and coffee reaching all-time highs.

Conversely, those on the descending arm are experiencing mounting challenges. Grocery prices have spiked at the fastest rate in almost three years, the labor market is showing signs of a slowdown, and an increasing number of subprime borrowers are defaulting on car loans.

Peter Atwater, a behavioral economics expert who coined the K-shape concept, observed, “There are now two Americas: A few small pockets of the invulnerable amid a swelling sea of desperation.”

Companies that sell to both branches have noticed the divide. McDonald’s CEO Chris Kempczinski recently warned of a “two-tier economy” with middle and lower-income consumers under “a lot of pressure.”

“Even toothpaste sales are a little weak — people are squeezing more out of the tube,” Tony DeSpirito, BlackRock’s global chief investment officer of fundamental equities, told Bloomberg this week.

Where is the split showing up?

Talk of a “K-shaped” recovery took off during the pandemic, when high-income households and select industries rebounded far more quickly than others.

In 2021, Labor Department researchers concluded that the lowest wage workers had the steepest decline in employment and experienced the slowest subsequent recovery.

“Increased inequality due to the pandemic may be an issue for years to come,” the report warned.

Since then, the divergence has started to show up in both subtle and unmistakable ways.

The car market

The average price paid for a new car recently passed the $50,000 mark for the first time, a record fueled by luxury buyers.

“Today’s auto market is being driven by wealthier households who have access to capital, good loan rates and are propping up the higher end of the market,” Cox Automotive executive analyst Erin Keating said in a statement.

Affordable new cars have all but vanished.

“The $20,000-vehicle is now mostly extinct, and many price-conscious buyers are sidelined or cruising in the used vehicle market,” Keating said.

The share of trade-ins with negative equity has climbed to nearly 30% and underwater borrowers owe an average of $6,905 more than their vehicles are worth, according to Edmunds.

A sign of further distress: the share of subprime auto loans that are 60 days or more overdue on their payments hit a record of more than 6% this year, Fitch Ratings data shows.

Airfare and hospitality

The divide is visible in travel as well.

Delta and United Airlines have pulled ahead by focusing on premium offerings in an industry known for notoriously thin margins.

“The premium products used to be loss leaders, and now they’re the highest margin products,” Delta President Glen Hauenstein said on a recent earnings call.

Meanwhile, budget carriers like Spirit, Frontier and JetBlue have all struggled to turn a profit as more cost-conscious flyers pull back.

Hilton has also found success at the higher end of the market, with CEO Chris Nassetta noting on the company’s earnings call that its luxury business has been performing “really well.”

What could it mean for the overall economy?

An increasingly K-shaped economy isn’t a crisis on its own, but it carries risks, with fewer households and sectors powering growth.

If spending at the top slows or stock market confidence falters, momentum could fade quickly.

“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,” Moody’s Analytics chief economist Mark Zandi wrote in September.

Concerns about an “AI bubble” have also heightened anxiety about an unbalanced economy, drawing comparisons to the late-1990s dot-com boom.

“There really do seem to be two economies right now — a booming AI economy and a lackluster everything-else economy,” journalist and author Derek Thompson wrote in a recent essay.

Harvard economist Jason Furman estimates that more than 90% of demand growth in the U.S. economy during the first half of the year came from just two GDP categories — information processing equipment and software.

Whether those investments in AI pay off remains to be seen, but for now, America’s expansion appears to be relying on a narrower base than before.