America’s K-shaped economy faces a new test

A surprising trend has emerged in Bank of America accounts, with the gap between America's wealthy and poor seeming to narrow in recent months. This counters the belief that the rich are getting richer, leaving the less well-off behind and the American Dream out of reach. This trend, often called the "K-shaped economy," has been blamed for many economic issues and a primary source of Americans' financial anxieties.

However, recent data suggests that the "K" may be getting closer together, with the spending growth gap between higher- and lower-income Americans being the narrowest in three years, and the savings gap between upper- and lower-income households starting to narrow.

The convergence in the "K" lines is also evident in paychecks, with no significant difference in earnings growth between the rich and the poor last month. Factors such as larger tax refunds, consumer spending during the World Cup, and a stable job market might have contributed to this narrowing. However, these recent developments are part of a broader trend that has narrowed the "K" since 2019, as pay for lower-income workers has kept pace with inflation, and government stimulus and social safety nets have supported lower-income workers.

Over the past seven years, the net worth of America's poorest has grown much faster than that of the upper middle class, and middle-class wealth has grown at a higher rate than the top 1%. The middle class is shrinking, but this is mostly due to more people becoming wealthier, not poorer. Some economists and business leaders have proposed alternative letters, such as "C" or "A," to describe the economy's current state.

For instance, Treasury Secretary Scott Bessent has argued that the "K-shaped economy" is over, while Hilton CEO Christopher Nassetta suggests that the economy is "C-shaped," with spending across all price points and income levels increasing.

Despite these positive signs, the "K" is far from dead. The cost of living has soared, and pandemic-era stimulus has faded, widening the gap between wealthier Americans and those struggling to cover basic expenses. For example, Catholic Charities Dallas, which served over 240,000 people in the last year, has seen a significant increase in demand for food assistance, with 60% of recipients using the service at least once.

The job market has also shown signs of weakness, with an unexpected job loss in July, which could lead to more stagnant wages, muted hiring, or layoffs. While tax refunds may provide temporary relief for some families, they are not enough to significantly bend the "K-shaped economy" itself.