The long-held notion of a “K-shaped” economy, characterized by divergent growth paths for different income groups, is being challenged by economists and industry leaders. As the U.S. economy evolves, new descriptors like “C” and “E” are emerging to capture shifting consumer behaviors and income trends.
While some, like Treasury Secretary Scott Bessent, advocate for a “C” shape indicating improved fortunes for lower-income consumers, others point to persistent indicators of inequality. The debate highlights the complexity of understanding the current economic landscape and its implications for policy and business.
- For years, the post-pandemic economy was largely characterized as "K"-shaped, signifying unequal growth across different economic groups.
- However, a growing debate among economists and industry leaders is questioning the continued relevance of the K-shape, with terms like "C" and "E" now being considered to describe the current economic landscape.
- While letter-based economic models have historically been used to explain downturns, their persistence years after a recession is noteworthy and may reflect heightened concerns about wealth inequality.
C. K. E.
These aren't just letters; they represent the evolving language economists, business leaders, and policymakers are using to define the current state of the U.S. economy. While the concept of a "K-shaped" recovery, highlighting divergent paths for different income groups, has dominated discussions since the pandemic, a new debate is emerging.
The prevailing "K" saw unequal expansion, with its arms pointing in opposite directions, reflecting a widening gap between high and low earners. Now, the economic community is grappling with whether this divergence persists or if the economy is shifting towards a "C" or "E" shape, suggesting a potential convergence or a different pattern of economic stratification.
"This is some of the alphabet soup," remarked Joel Mokyr, a Nobel Prize-winning economic historian at Northwestern University, encapsulating the fluidity of these economic descriptors.
The effort to label the economy is more than a semantic exercise; it has significant implications for policy and business strategy, particularly concerning wealth inequality, which has been a central concern for politicians, central bankers, and consumer companies.
For decades, letter shapes have been a concise way to summarize economic trends, especially after significant downturns, with historical examples including "V"-, "L"-, and "W"-shaped recoveries.
However, Don Rissmiller, chief economist at Baird Strategas, notes the unusual longevity of these descriptors among the general public years after a recession, attributing it to persistent concerns about wealth inequality.
"During recessions and recoveries, the letters are really popular," Rissmiller said. "To use a letter in the middle of a business cycle, I guess we could say that's a little new."
From K to C: A Shift in Consumer Fortunes?
Treasury Secretary Scott Bessent recently challenged the prevailing "K" narrative, proposing that the economy is now exhibiting a "C" shape. This view suggests that lower-income consumers are gaining ground, a perspective Bessent attributes to factors like wage growth among lower earners and targeted tax policies.
Bessent cited President Donald Trump's "no tax on tips" and "no tax on overtime" policies as contributing factors to the improved fortunes of those at the lower end of the economic spectrum.
"I got sick of hearing about this K-shaped economy," Bessent, a prominent economic advisor to Trump, stated recently. "I can say here definitively, the K-shaped economy is over."
Other prominent figures echo Bessent's optimism. Hilton Worldwide CEO Christopher Nassetta recently informed analysts that the company is observing a distinct "C"-shaped economy.
Nassetta suggested that the convergence between different economic strata isn't driven by a decline in high-income spending but rather by a significant uptick in growth within Hilton's middle and upper-middle market segments, which have shifted from negative to positive growth rates as high as 6%.
"The middle class is getting back in the game," Nassetta asserted. "It's really impossible to deny."
However, not all economists share this optimistic outlook. Anthony Chan, former chief economist at JPMorgan, argues that the ongoing geopolitical tensions, such as the U.S. involvement in conflicts, complicate the narrative of a converging economy.
Chan points out that lower-income households, which allocate a larger portion of their income to energy, are disproportionately affected by rising gas prices. This sensitivity to energy costs, exacerbated by potential inflation from global conflicts, could undermine any gains from government initiatives aimed at increasing tax refunds or improving 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."
The Persistent K: Inequality's Shadow
Chan's skepticism is reinforced by persistent indicators of a "K"-shaped economy. Weak consumer sentiment and the escalating cost of living continue to be defining issues, particularly as they influence the upcoming midterm election cycle.
The University of Michigan's closely watched survey revealed a significant drop in consumer sentiment in August, nearing historic lows. Joanne Hsu, the survey's director, highlighted that confidence among low- and middle-income respondents experienced a particularly sharp decline.
This sentiment is mirrored by leaders in various consumer-facing industries. Shane Grant, chief of operations for the Americas at Colgate-Palmolive, remarked at a recent conference that the "K"-shaped dynamic remains very much alive in the United States.
Similarly, Bill Boltz, a merchandising executive at Lowe's, indicated that the "K"-shaped economy continues to be a significant factor influencing consumer spending trends. Nicholas Fink, CEO of Constellation Brands, even suggested that the economy is looking "increasingly" like a "K."
Despite these persistent observations, some analysts are beginning to see signs of the "K"-shaped economy weakening. A recent report from the Federal Reserve Bank of Richmond indicated that while income divergence might not have been pronounced between 2021 and 2023, consumption patterns did show a clear "K" divergence during that period.
The Bank of America Institute has also noted a potential shift. While higher earners had previously led credit card spending, the gap across income classes began to narrow in May of this year.
"What was once a 'K'-shaped consumer is increasingly becoming one of convergence," David Michael Tinsley, the institute's senior economist, communicated to clients.
However, research from the New York Fed on credit card debt suggests the "K"-shaped economy's influence endures, with substantial credit card balances indicating that a significant number of households are still living paycheck to paycheck.
The Rise of the 'E' Shape?
Beyond the "C" shape, some economists are proposing an "E"-shaped economy, suggesting a more complex stratification where three distinct income groups exist, neither diverging further nor converging significantly.
Rissmiller of Baird Strategas explains this model as: "Each group has found a way to live." While not necessarily ideal, this outcome suggests a degree of stability.
Michael Eisenband, global chairman of corporate finance at FTI Consulting, believes the "E"-shape designation offers a more accurate depiction of current spending patterns across different income levels, serving as a "more fitting depiction of the times."
Heather Long, chief economist at Navy Federal Credit Union, finds the "E"-shape description more apt than a "C" because it acknowledges the struggles of a middle class that is merely holding on, deeming the notion of convergence between low and high earners as requiring "some real mental gymnastics."
Wyndham Hotels & Resorts CEO Geoff Ballotti noted that while its middle-tier consumers are showing signs of improvement and regaining confidence, this could align with either a "C" or an "E"-shaped economy.
For some executives, the "E"-shaped economy remains an unfamiliar concept. Scott Thompson, CEO of Somnigroup International, admitted to being unaware of the "E" designation during a recent earnings call, stating, "That's a new one for me. I was ready for K; hadn't thought about E."
