WASHINGTON (AP) \u2014 From corporate executives to Wall Street analysts to Federal Reserve officials, references to the \u201cK-shaped economy\u201d are rapidly proliferating.<\/p>\n
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. <\/p>\n
A big reason the term is popping up so often is that it helps explain an unusually muddy and convoluted period for the U.S. economy. Growth appears solid<\/a>, yet hiring is sluggish<\/a> and the unemployment rate has ticked up<\/a>. Overall consumer spending is still rising, but Americans are less confident<\/a>. AI-related data center construction is soaring while factories are laying off workers and home sales are weak. And the stock market still hovers near record highs even as wage growth is slowing.<\/p>\n 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. <\/p>\n \u201cThose at the bottom are living with the cumulative impacts of price inflation,\u201d said Peter Atwater, an economics professor at William & Mary in Virginia. \u201cAt the same time, those at the top are benefiting from the cumulative impact of asset inflation.\u201d <\/p>\n Here are some things to know about the K-shaped economy: <\/p>\n Not an L, U or V<\/p>\n Atwater actually popularized the label \u201cK-shaped economy\u201d 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. <\/p>\n \u201cThere was sort of this land-grab for letters,\u201d Atwater said. \u201cTo me the letter that made the most sense was K.\u201d <\/p>\n 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%. <\/p>\n Inequality persists<\/p>\n 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 \u2014 restaurants, hotels, entertainment venues \u2014 were caught short-staffed and sought to rapidly increase hiring. Lower-income workers saw larger pay gains than higher-paid ones. <\/p>\n 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. <\/p>\n \u201cWe had that kind of two-year period where the bottom was catching up and that talk of the K-shape went away,\u201d Dario Perkins, an economist at TSLombard, said. \u201cAnd since then, the economy\u2019s cooled down again,\u201d he added, bringing back K-shape references.<\/p>\n 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%. <\/p>\n Slower income growth has left many lower-income workers less able to spend. Based on data from its credit card and debit card customers, Bank of America found that spending among higher-income households rose 2.7% in October compared with a year ago, while lower-income groups lagged at just 0.7%.<\/p>\n And a Federal Reserve Bank of Boston study in August<\/a> found that consumer spending in recent years has been driven by richer households, while lower- and middle-income Americans have piled up more credit card debt even as they\u2019ve spent less. <\/p>\n Businesses take note<\/p>\n 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. <\/p>\n Henrique Braun, chief operating officer at Coca-Cola, for example, said in late October that the company is pursuing both \u201caffordability\u201d and \u201cpremiumization.\u201d It is generating more of its earnings from higher-end products such as its Smartwater and Fairlife filtered milk brands, while at the same time introducing mini cans for those looking to spend less. <\/p>\n \u201cWe continue to see divergency in spending between the income groups,\u201d Braun said in a conference call with analysts last month. \u201cThe pressure on middle and low-end income consumers is still there.\u201d<\/p>\n Sales of first- and business-class tickets have been fueling revenue and profit for Delta Air Lines, its CEO Ed Bastian said in October<\/a>, while lower-end consumers have been \u201cclearly struggling.\u201d<\/p>\n