Wall Street Warns Of Divided Economy—Here’s What To Know

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As Americans have raised concerns about rising prices, a possible recession, a cooling labor market and an ongoing government shutdown in recent months, economists have warned the U.S. economy may be “K-shaped,” with spending trends becoming divided among low- and high-income consumers.

High-income Americans are driving consumer spending in the U.S., analysts say.

Key Facts

A “K-shaped” economy marks a period in which sectors take on different paths to recovery, and economists tend to identify these periods based on spending trends, in addition to employment and wage growth.

JPMorganChase reported earlier this month income growth for Americans aged 25 to 54 slipped from about 3% annually to 2%, matching similar rates during a financial crisis from 2007 to 2009.

Federal Reserve Chair Jerome Powell said last month there was “anecdotal” data indicating the U.S. economy had become divided, including recent layoffs and a slowing labor market, while also citing earnings reports that suggested “consumers on the lower end are struggling.”

Powell noted consumer spending had risen and defied “a lot of negative forecasts,” but it may be fueled by “mostly high-end consumers,” adding, “Lower-income Americans are pulling back while higher earners continue to spend.”

Tristan Margot, TD Securities’ head of thematic content, wrote earlier this week the company’s surveys revealed a “sharply bifurcated economy,” as fewer high-income households appear to be cutting back on their spending, while middle- and low-income households reported “persistent economic anxiety.”

Samuel Tombs, chief U.S. economist for Pantheon Macroeconomics, told Reuters a pause for Supplemental Nutrition Assistance Program funding—assisting about 41.7 million people per month in 2024—would impose “significant hardship on many households.”

These Companies Say Low-Income Consumers Are Cautious With Spending

“In the U.S., we continue to see a bifurcated consumer base,” McDonald’s CEO Chris Kempczinski told analysts on Wednesday, noting restaurant traffic among low-income customers declined in the double digits through its latest quarter. In contrast, traffic growth among higher-income consumers “remained strong” and increased by nearly double digits, Kempczinski said. He previously said McDonald’s expanded its cheaper value menu earlier this year in response to a divided consumer landscape, which Kempczinski called a “two-tier economy.” Last week, Procter & Gamble’s chief financial officer Andre Schulten said the “consumer environment is not great, but stable,” as Schulten said lower-income shoppers appear to be more cautious with their spending and cash on hand. Adam Rymer, Chipotle’s chief financial officer, told Reuters earlier this year that lower-income customers are “feeling pressure right now,” which Rymer said would be under consideration should the company choose to adjust prices.

When Has The U.s. Experienced A ‘k-Shaped’ Economy?

The U.S. economy was most recently labeled “K-shaped” in the “recovery” period after the pandemic, as low-income workers faced widespread layoffs and reduced hours, while work-friendly, high-income sectors like tech and finance grew rapidly. Visa warned of a possible “K-shaped” economy in December 2019, citing slower growth among businesses despite consumer spending accelerating amid fears of a looming government shutdown.

Key Background

Americans have grown increasingly pessimistic about the U.S. economy in recent months, according to recent surveys. The Conference Board think tank reported last week that consumers are “a bit more pessimistic” about job availability and labor market conditions, while respondents remained “mostly negative overall” about the economy. Stephanie Guichard, a senior economist at the Conference Board, said references to U.S. politics rose “notably,” with multiple mentions and “key concerns” cited about the government shutdown. Joanne Hsu, director of the University of Michigan’s consumer sentiment report, has said numerous times this year that consumers are “frustrated by the persistence of high prices,” with many reporting their personal finances had deteriorated as a result.