Economists and business leaders are grappling with how to characterize the current U.S. economy, moving beyond the long-held “K-shaped” recovery. While some, like Treasury Secretary Scott Bessent, champion a “C-shaped” convergence fueled by gains for lower-income consumers, others insist the “K-shape” of inequality persists, citing weak consumer sentiment and rising costs. A new “E-shaped” model is also emerging, suggesting three distinct, parallel economic classes.
C. K. E. No, these aren't just initials or Greek letters; they're the hotly debated terms economists, corporate titans, and politicians are using to define the current state of the U.S. economy.
For years following the pandemic's upheaval, the consensus largely described the economy as "K"-shaped. This signified an unequal expansion, where some sectors and income groups surged ahead while others languished, diverging like the arms of the letter K. However, that consensus is now fracturing, with new letters like "C" and "E" gaining traction in academic discussions and Wall Street boardrooms.
"This is some of the alphabet soup," remarked Joel Mokyr, a Nobel Prize-winning economic historian at Northwestern University. This isn't merely a semantic exercise; the debate over the economy's shape directly impacts policy decisions, especially concerning wealth inequality and consumer behavior, which have been central concerns for policymakers and businesses alike.
While letter shapes have long been used to characterize economic cycles, particularly after major downturns (think V-, L-, or W-shaped recoveries), it's unusual for such descriptions to persist several years past a recession. Don Rissmiller, chief economist at Baird Strategas, notes that heightened awareness of wealth inequality might be fueling this enduring debate.
From K to C: A New Narrative?
Treasury Secretary Scott Bessent recently made headlines by confidently declaring the K-shaped economy to be "over." Instead, he argued, a "C"-shaped economy is taking hold, signifying a convergence where the lowest-income consumers are finally gaining ground. Bessent attributed this shift to wage increases for lower earners and recent tax cuts, specifically pointing to President Donald Trump's "no tax on tips" and "no tax on overtime" policies.
"I got sick of hearing about this K-shaped economy," Bessent told CNBC. "I can say here definitively, the K-shaped economy is over."
Hilton Worldwide CEO Christopher Nassetta echoed this sentiment, observing a "C"-shaped economy where the middle and upper-middle segments of his hotel company are experiencing growth rates as high as 6%, reversing previous negative trends. "The middle class is getting back in the game," Nassetta affirmed. "It's really impossible to deny."
However, Anthony Chan, JPMorgan's former chief economist, injects a note of caution, suggesting that the U.S. war with Iran could disrupt this hopeful convergence. Lower-income consumers disproportionately spend more on energy, making them vulnerable to surging gas prices and persistent inflation. This could negate any gains from White House initiatives to increase tax refunds or boost housing affordability. "I'm the first to say that we can make some progress," Chan stated, "But nothing of the sort of progress that we can say we can bury the K-shaped economy."
Still a K: Lingering Inequality
Indeed, many argue that the K-shaped economy remains firmly entrenched. Weak consumer sentiment and the escalating cost of living continue to be defining issues, particularly ahead of the midterm election cycle. The University of Michigan's closely watched survey reported an 11% drop in consumer sentiment in August from a year ago, with low- and middle-income respondents experiencing an outsized hit.
Leaders at several consumer-facing companies still observe clear signs of a K-shaped economy. Shane Grant, Colgate-Palmolive's operations chief for the Americas, affirmed at a Deutsche Bank conference, "The dynamic of a K-shaped economy we see is alive and well in the United States." Similarly, Bill Boltz, a merchandising executive at Lowe's, noted that the K-shaped economy continues to influence consumer spending. Nicholas Fink, CEO of Constellation Brands (maker of Modelo beer and Robert Mondavi wine), even suggested the economy looks "increasingly" like a K.
Despite this, some are starting to see cracks in the long-dominant K-shaped narrative. A recent report from the Federal Reserve Bank of Richmond found that while income growth didn't show a K-shaped divergence between 2021 and 2023, consumption patterns clearly did. However, the Bank of America Institute suggests this consumption gap is now narrowing, indicating a potential "convergence" among consumers across income classes.
Conversely, researchers at the New York Fed highlight that their latest findings on credit card debt, nearing a record $1.26 trillion, underscore the persistence of the K-shaped economy, pointing to many households living paycheck to paycheck.
Evolution to E: Three Parallel Tracks
Another school of thought proposes that the economy has evolved into an "E"-shape. This view suggests three distinct classes of Americans that are neither converging nor diverging significantly, but rather existing on parallel, albeit unequal, tracks. "Each group has found a way to live," explained Don Rissmiller of Baird Strategas, adding, "It may not be the best outcome, but it is an outcome that looks more stable than not."
Michael Eisenband, global chairman of corporate finance at FTI Consulting, believes the E-shaped assessment "better illustrates" clearly divergent spending patterns among different income groups, serving as a "more fitting depiction of the times."
Heather Long, chief economist at Navy Federal Credit Union, finds the E-shape more accurate than the K because it better captures the struggles of a middle class simply "hanging on." She argues that interpreting a convergence between low- and high-earners requires "some real mental gymnastics." Wyndham Hotels & Resorts CEO Geoff Ballotti also acknowledged that while his middle-tier consumers are "feeling better," this could reflect either a C- or E-shaped economy.
For some executives, however, the E-shaped economy remains a novel concept. Scott Thompson, CEO of Somnigroup International (maker of Tempur-Pedic mattresses), admitted to being out of the loop when asked about it during an earnings call. "That's a new one for me," Thompson said. "I was ready for K; hadn't thought about E."
