• 'This term refers to the widening economic divide that has developed in the US, where white-collared workers have done far better and have risen economically like the arm of the letter K, while blue-collar workers have fallen further and further behind like the leg of the K,' says Peter W. Atwater from College of William & Mary
• ‘If the economy is dependent on the wealth of high-income households, it is dependent on the performance of the stock market. While very unpredictable, it appears the stock market is richly valued and at risk of a correction, which could result in a weakening in spending,' says Scott Hoyt from Moody's Analytics

ISTANBUL/WASHINGTON

Due to the rapidly widening economic divide between upper- and lower-income groups in the US, the concept of the "K-shaped economy" is becoming increasingly important; concerns are growing about the future of the "K-shaped economy."

It is noteworthy that the "K-shaped economy," a term first used to describe the uneven recovery following the COVID-19 pandemic in 2020, has resurfaced in the US.

Higher-income earners, benefiting from rising stock prices and housing prices, continue spending, while lower-income earners are curtailing their spending due to their wages not keeping pace with persistent inflation and slowing employment.

The widening economic gap between upper- and lower-income groups is described by the concept of the "K-shaped economy."

According to data from the Federal Reserve, the top 10% of the income pyramid holds 67% of total household wealth, while the bottom 90% owns 33%.

An analysis from the Peter G. Peterson Foundation also revealed that the concentration of income in high-income households has become more pronounced since 1981.

Consumer spending, which accounts for almost two-thirds of economic activity in the US, has recently shifted significantly to the upper-income bracket.

According to an analysis by Mark Zandi, Chief Economist at Moody's Analytics, households in the top 10% of the income pyramid account for almost half of the spending; this figure has increased by five percentage points since the pandemic and by 15 percentage points since the beginning of the 1990s.

The Fed's Beige Book report, released on Nov. 26, also highlighted the divergence among consumers; the report noted that while overall consumer spending has declined further, spending at the upper side has remained resilient.

While data indicates that the US economy is largely supported by high-income earners, economists note that the divergence between upper and lower income groups poses risks to financial stability and the economic outlook.

Economists warn that as long as high-income earners continue spending, the economy can avoid a recession, but if this segment adopts a cautious stance for any reason, the economy could face significant problems.

The term ‘K-shaped economy’ refers to a widening economic gap

Peter W. Atwater, an adjunct lecturer of economics at the College of William & Mary, told Anadolu: "This term refers to the widening economic divide that has developed in the US, where white-collared workers have done far better and have risen economically like the arm of the letter K, while blue-collar workers have fallen further and further behind like the leg of the K."

Atwater noted that he observed the K-shaped pattern in the US economy in three key ways.

"First, the concentration of investment wealth has never been more concentrated in so few at the very top of the economy.

"Second, consumer spending by the top 10%-15% of Americans represents half of all spending.

"Third, sentiment surveys show that those at the top of the economy feel far more confident than those at the bottom, who now feel increasingly desperate."

Trickle-down economics

Atwater noted that fiscal and monetary policies following the COVID-19 pandemic were based on a "trickle-down economics" approach based on the belief that businesses and companies at the top receive significant financial incentives and that these benefits will ultimately trickle down to those at the bottom.

"Unfortunately, for those at the bottom, not only haven't those benefits arisen, but they have been hit particularly hard by the cumulative inflation in food, housing, childcare, and health care," he added.

Describing the current American economy as a "top-heavy Jenga tower," he noted: "The gap between the top and bottom has not only become extreme, but confidence at the top is highly dependent on continued gains in the financial markets, which today are highly concentrated in AI."

Atwater said that a huge burden currently falls on the shoulders of a very small number of people who are now disproportionately exposed to AI, and if that bubble bursts, it could take the entire American economy with it.

‘Credit problems indicate serious problems at the bottom of income distribution’

Scott Hoyt, senior director for economic research at Moody’s Analytics, also said the US economy currently follows a K-shaped pattern.

"While the weakened labor market and high inflation weigh on all consumers, credit problems suggest the problems are severe at the lower end of the income distribution, while slowly rising house prices provide a mild offset for middle-income consumers and the strong stock market provides a major offset for higher-income consumers."

Hoyt, noting that the share of spending by high-income households is increasing according to his estimates, said that current monetary policy is a minor factor in the divergence between upper- and lower-income groups.

"High interest rates benefit high-income savers and weigh on low-income borrowers. Federal Reserve rate cuts will reduce this impact," he said.

Addressing the risks of a K-shaped economy, he noted: "If the economy is dependent on the wealth of high-income households, it is dependent on the performance of the stock market.

"While very unpredictable, it appears the stock market is richly valued and at risk of a correction, which could result in a weakening in spending."

He said people see credit problems at the low end of the income distribution, and while the financial industry appears well capitalized in aggregate, recent problems with a few subprime auto lenders show that there may be pockets of weakness.

"If any were to prove more systemic than anticipated, there could be broader instability. Finally, the K-shaped economy has the potential to contribute to social unrest and political polarization," he added.