The K-Shaped Drift
Authors & Contributors
Can resilient GDP growth weather a widening divide between consumer spending?
The US economy remains resilient, with real GDP on track to grow around 2% in 2025. Consumption, which makes up nearly 70% of the total, has been the backbone of expansion. Within this decade, real personal consumption has grown 3.3% per year on average, nearly a percentage point higher than the prior decade’s 2.4% trend. That above-trend growth owed in part to the tailwinds of a strong labor market and excess savings that had accumulated during the pandemic. As job creation cools and those excess savings have been utilized, the growth of spending has slowed.
Real Personal Consumption Expenditures Ex-Food and Energy
A growing concern is that consumer spending rests on the fragile foundation of a widening divide between higher and lower income households, commonly referred to as a “K-shaped economy.” As household wealth has grown it has become more concentrated. The top 20% of income earners hold 71% of total wealth. With the top 10% owning 87% of all equities, equity market gains largely flow to wealthier households. Also, equity valuations have risen sharply this year, with the S&P 500® up 14% in the year through November—performance partly driven by optimism around artificial intelligence (AI).
Wealth by Income Percentile
Lower-income consumers are under pressure from a softening job market and rising prices squeezing their budgets. According to consumer surveys, sentiment is around record lows. Lower-income households spend a higher share of their take-home pay on goods, which are categories that are susceptible to price increases due to tariffs.
The Federal Reserve (Fed), concerned about labor market vulnerability, resumed cutting rates in September as insurance against further weakness, even at the cost of slightly higher inflation in 2026. A Fed under new leadership may guide rates toward 3% by the end of 2026. Still, monetary policy is a blunt tool and cannot offset structural shifts in consumer behavior.
Our baseline view is that easing policy may provide some cushion, allowing growth to hover near trend in 2026. However, risks are still rising. Equity valuations are high by historical standards, fueled by enthusiasm for AI. A wave of AI investments could deliver meaningful productivity gains over time, but there is uncertainty about how technology firms will monetize these advances, and sentiment could shift quickly. The wealth effect works in reverse, too, and capital losses could ripple through spending, exposing the economy’s reliance on a narrow base of consumers.
The US consumer is skating on thinner ice. For now, policy support and market wealth keep the surface intact, but cracks could widen if markets falter.
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