Polarized U.S. Economy Braces for a Deeper K-Shaped Shock

Booming Incomes, Assets, and Spending Among High Earners
Low-Income Households Squeezed by Rates, Prices, and Delinquencies
Asset Inequality Poised to Widen Further with Technological Change

The U.S. economy is once again splitting into two divergent tracks. A surge in equity markets and a boom in artificial intelligence (AI) investment may suggest broad-based momentum, but beneath the surface, the gap between the “upper K” and the “lower K” is widening. High-income households are expanding spending as both wages and asset values climb, while low-income households struggle just to stay afloat under the weight of inflation, debt, and rising delinquencies. Experts describe this as a latent fracture that threatens to distort the trajectory of the U.S. economy.

Fed Flags Intensifying Consumption Polarization

In its Beige Book released on the 26th (local time), the Federal Reserve reported that the U.S. is experiencing a deepening K-shaped consumption pattern, marked by widening disparities across income groups. Affluent consumers continue to spend freely, while the rest of the population is tightening its belt—a divergence that resembles the upward and downward strokes of the letter “K.”

According to the Fed, regional banks in New York, Atlanta, Minneapolis, and elsewhere reported that “wealthy consumers continue spending regardless of economic conditions, but middle- and lower-income households are cutting back.” The Fed also discussed the issue in its October meeting, during which Chair Jerome Powell said that evidence of polarization was mounting.

Signs of divergence were also evident in retail sales data released by the Commerce Department on the 25th. Retail sales rose 0.2% in September—half the 0.4% increase economists had expected. Because retail sales are not adjusted for inflation, a 0.2% nominal increase likely implies an actual decline in consumption after accounting for price increases. Analysts attribute the slowdown to weakened demand among middle- and lower-income households amid concerns about a cooling labor market.

Low-Income Households Hit Hard by Prices and Rates

Bloomberg reports that U.S. consumer spending is now more concentrated among the top 10% of earners than at any point in recent history; this group accounts for roughly half of total consumer spending. The top 20% are responsible for nearly two-thirds. By contrast, the remaining 80% now account for just 37% of consumption, down from 42% before the pandemic. High-income households have sustained spending thanks to gains in equities and real estate, but lower-income consumers have cut back amid labor-market uncertainty. In effect, America’s growth engine rests on spending by the upper tier.

This expansion of the lower segment of the K-shape stems largely from diverging wage trends. A Bank of America Institute analysis finds that, for the first time since 2016, wage growth among high-income households has surpassed that of low- and middle-income groups. Inflation has compounded the pressure on low earners. The latest Consumer Price Index showed gas and electricity prices jumping 13.8% and 6.2% year-over-year, respectively. Food prices rose 0.6% month-over-month, the highest increase in two years. Tariffs have also driven up the cost of clothing, toys, appliances, and furniture, while the resumption of student loan payments earlier this year has added further strain—pushing low-income households to the brink.

Rapid rate hikes since the pandemic have eroded low-income purchasing power. According to VantageScore, which analyzed 60-day-plus delinquencies from January 2020 through September this year, delinquency rates among households earning under $45,000 annually have surged since the pandemic and have not declined since 2022. A report from Harvard’s Joint Center for Housing Studies shows that, as of 2023, roughly half of American renters—22.6 million people—spend more than 30% of their income on housing, up 3.2 percentage points from 2019.

High housing costs have sharply reduced disposable income. Among renters earning under $30,000 a year, median residual income after rent fell to just $250 a month in 2023—down 55% from 2001. Meanwhile, high-income households continue accumulating wealth. The AI investment boom, combined with gains in tech equities and real estate values, has significantly inflated asset portfolios among affluent households.

AI Productivity Gains Set to Amplify Wealth Inequality

Income polarization is expected to intensify as technological innovation advances. According to the IMF’s report “AI Adoption and Inequality,” high-income workers are likely to experience productivity gains from AI tools, which can in turn lift their wages. AI adoption is also projected to enhance data efficiency and increase returns on capital—benefits that disproportionately accrue to high-income workers who already hold high-risk, high-return assets. As a result, the wealth Gini coefficient is estimated to rise by 7.18 percentage points. This far outpaces the projected 1.73-point decline in wage-inequality Gini, underscoring that gains in capital income exceed any reduction in wage disparities.

The concern is that such polarization now threatens the sustainability of U.S. growth. Federal Reserve officials have voiced alarm. Philadelphia Fed President Anna Paulson warned, “Nearly all job gains this year have come from healthcare and social assistance. Growth supported by high-income spending and AI-driven equity rallies rests on an excessively narrow base.” Heavy dependence on asset markets, she noted, inevitably magnifies macroeconomic volatility.

Jared Bernstein, former Chair of the Council of Economic Advisers under the Biden administration, observed: “A one-dollar decline in stock-market wealth reduces consumption by two to three cents. Growth has become overly sensitive to the asset values of a small segment of households.”

Wall Street analysts also warn that if markets correct, the “lower K” will be the first to collapse, with shockwaves spreading quickly. Stress signals are already flashing in credit markets. Fitch Ratings reports that 60-day-plus delinquencies on U.S. subprime auto loans have hit a record-high 6.7%, while vehicle repossessions have surged to 1.7 million—over 40% higher than two years ago. These figures underscore that credit deterioration among lower-income households is already underway.

Experts caution that “the biggest risk to the U.S. economy today is the imbalance of growth.” Headline indicators may reflect solid momentum, but the recovery is skewed by outsize spending at the top. Ultimately, the issue is not the rate of growth but its composition. The lower segment of the K is already under prolonged stress—and when a shock arrives, it will be the first to falter.