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What does “K-shaped economy” mean?
The metaphor describes outcomes splitting like the arms of a K. The upward arm usually represents households doing better—often higher-income or wealthier households—while the downward or flatter arm represents households doing worse or improving more slowly. It is a shorthand, not an official economic statistic, and researchers do not use one universally accepted definition.
The Federal Reserve Bank of Richmond uses a relatively strict definition: outcomes for high-income households improve while outcomes for low-income households worsen. Under that definition, unequal gains alone are not enough to call a pattern K-shaped. A useful claim should specify what outcome is diverging, which groups are being compared and over what period. Richmond Fed, July 2026
What do the income and spending data show?
Income rose across groups over the longer run
The Richmond Fed’s analysis of U.S. household income and consumption from 1994 through 2024 finds that real after-tax income increased for all three income groups, though growth was much faster at the top. Average real income growth over that period was about 13% for low-income households, roughly 26% for middle-income households and close to 63% for high-income households. Because low-income households’ income rose rather than fell, this long-run income pattern does not meet the Richmond Fed’s strict definition of K-shaped. The analysis uses income quintiles and data from the Current Population Survey and Consumer Expenditure Survey. Richmond Fed, July 2026
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Consumption can diverge even when income does not
The same Richmond Fed study finds consumption was K-shaped over 2021–2023, even though income was not. That distinction matters: income measures money received, while consumption measures spending. A conclusion about one does not automatically establish the same pattern in the other. Richmond Fed, July 2026
Recent spending studies do not tell one consistent story
A 2026 Federal Reserve Bank of Minneapolis review compares several widely cited measures and finds that they are not interchangeable. Bank of America’s figures track credit- and debit-card spending by that bank’s customers, leaving out non-card spending and not representing every U.S. household. New York Fed indicators draw on a Numerator panel of 200,000 households. Moody’s estimate is not a direct measure of household consumption: it infers savings rates for income groups from Federal Reserve financial-flow data and household wealth surveys, then treats remaining disposable income, or personal outlays, as a broad spending measure. The review notes that critics question assumptions in that method. Minneapolis Fed, 2026
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Within the Minneapolis Fed review, Bank of America’s card data show a gap opening around mid-2025: lower-third customer spending shrank then and remained nearly flat until early 2026, while growth differed across lower-, middle- and upper-income customers. The New York Fed data reviewed there do not show wide retail-spending dispersion in 2025; over five years, group growth rates move more closely together. Since 2020, the New York Fed series shows nominal spending growth of 29% for low-income households and 36% for high-income households. These are nominal, not inflation-adjusted, figures. The review concludes that the available data do not align into a clear, single K-shaped account. Minneapolis Fed, 2026
Another payments study finds faster growth at the top, not falling spending below
An Atlanta Fed paper analyzing U.S. payments-survey transaction data for 2021–2025 finds that spending by households in the fourth and fifth income quintiles grew substantially faster than spending by those in the first through third quintiles. The gap appears across total spending, groceries and necessities. Both groups increased spending, so the paper describes a bifurcated recovery with sharply different growth rates—not the canonical pattern in which one group’s spending declines while another’s expands. Atlanta Fed, May 18, 2026
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Aggregate measures combine households with very different incomes, wealth and spending behavior. If one group has stronger gains, its spending or asset holdings can contribute to a healthy-looking total even while other households face more strain. That does not mean every affluent household is thriving or every lower-income household is struggling; group averages describe patterns, not any particular person’s finances.
Wealth can widen the difference. A Federal Reserve Board research note finds wealth increasingly concentrated among high-income households and says asset-price growth over the preceding five years may have disproportionately supported their spending. But it also finds that greater concentration reduces the average propensity to consume out of wealth: in aggregate, consumption responds less strongly to changes in wealth than it once did. Stock-market performance alone therefore cannot prove that the whole economy is K-shaped. Federal Reserve Board, 2026
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What has the Federal Reserve said about the divide?
Federal Reserve Governor Lisa D. Cook described the concern in a February 4, 2026 speech: “This divergence is sometimes called a ‘two speed’ or ‘K-shaped’ economy, in which the well-off are doing well, while vulnerable households are not.” She pointed to higher delinquencies and signs that vulnerable households’ spending had stagnated relative to higher-income households. This is Cook’s attributed assessment, not an official Federal Reserve definition of the term. Cook, February 4, 2026
The New York Fed’s Economic Heterogeneity Indicators track national differences by income, education and race or ethnicity in retail spending excluding autos and gasoline. They also show especially pronounced net-worth and financial-asset growth since 2023 for high-income, high-wealth, college-educated and white households. The page explicitly says the indicators are not official estimates of the New York Fed, its president, the Federal Reserve System or the FOMC; they should be read as research indicators. New York Fed Economic Heterogeneity Indicators
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How to judge a K-shaped claim
When you encounter a claim that the economy is K-shaped, check whether it is comparing like with like:
- Outcome: Is the claim about income, spending, wealth, employment, prices or sentiment?
- Time window: Does it cover the pandemic recovery, 2021–2023, mid-2025 onward or a longer stretch?
- Groups: Are the categories income quintiles, income terciles, wealth groups, demographic groups or a particular company’s customers?
- Data and method: Is the evidence from a survey, payment transactions, household expenditure records or an estimate built from financial flows and wealth surveys?
- Meaning of “K”: Is one group actually declining, or are both groups improving at different rates?
Those distinctions explain why studies can appear to disagree without measuring the same thing. Faster spending growth among higher-income households is evidence of divergence, but it does not by itself show that lower-income households’ spending fell. Conversely, an increase in income across groups does not rule out divergent consumption or wealth outcomes.
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