In recent months, as Americans worry about rising prices, a possible recession, a cooling labor market and the ongoing government shutdown, analysts have warned that the U.S. economy could become “K”-shaped, with spending trends split between low- and high-income consumers.
Key data
A “K-shaped” economy marks a period in which sectors take different paths to recovery, and economists tend to identify these periods based on spending trends as well as job and wage growth.
JPMorganChase reported earlier this month that income growth for Americans ages 25 to 54 fell from about 3% annually to 2%, reaching rates similar to those of a 2007 to 2009 financial crisis.
Federal Reserve Chair Jerome Powell said last month there was “anecdotal” data indicating the US economy had splintered, including recent layoffs and a slowing labor market, while citing earnings reports suggesting “consumers at the bottom are struggling.”
Powell noted that consumer spending had increased and defied “many negative forecasts,” but could be driven primarily by “high-income consumers,” adding: “Lower-income Americans are reducing their spending, while higher-income Americans continue to spend.”
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Tristan Margot, head of thematic content at TD Securities, wrote earlier this week that the company’s surveys revealed a “clearly bifurcated economy,” as fewer high-income households appear to be cutting back on their spending, while lower- and middle-income households reported “persistent economic anxiety.”
Samuel Tombs, chief US economist at Pantheon Macroeconomics, told Reuters that a pause in funding for the Supplemental Nutrition Assistance Program (SNAP), which serves about 41.7 million people a month in 2024, would impose “significant hardship on many households.”
Low-income consumers are cautious with their spending
“In the U.S., we continue to see a bifurcated consumer base,” McDonald’s CEO Chris Kempczinski told analysts Wednesday, noting that restaurant traffic among low-income customers declined by double digits during 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 had expanded its cheaper value menu earlier this year in response to a divided consumer landscape, what Kempczinski called a “two-tier economy.”
Last week, Procter & Gamble Chief Financial Officer Andre Schulten said the “consumer environment is not ideal, but it is stable,” adding that 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 low-income customers “are feeling the pressure right now,” which Rymer said would be taken into account if the company decided to adjust prices.
When has the US experienced a ‘K-shaped’ economy?
The economy was most recently labeled “K-shaped” in the “recovery” period after the pandemic, as low-income workers faced mass layoffs and reduced hours, while high-income sectors, such as technology and finance, grew rapidly. Visa warned of a possible “K-shaped” economy in December 2019, citing slower growth among businesses despite accelerating consumer spending due to fears of a possible government shutdown.
Key background
Americans have become increasingly pessimistic about the US economy in recent months, according to recent polls.
The Conference Board think tank reported last week that consumers are “a little more pessimistic” about job availability and labor market conditions, while respondents remained “mostly negative overall” about the economy.
Stephanie Guichard, senior economist at the Conference Board, said references to US politics increased “noticeably,” 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 on several occasions this year that consumers are “frustrated by the persistence of high prices,” with many reporting that their personal finances had deteriorated as a result.
This article was originally published on Forbes US
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