The uncomfortable new normal for the U.S. economy: spending growth concentrated at the top of the income ladder, a split largely explained by wealth gains from financial assets.
Why it matters: The K-shaped economy is real, though it is not particularly new. That's the conclusion of research out Friday morning from the Federal Reserve Bank of New York.
- It confirms an economic risk lurking beneath an economy that is navigating relentless disruption — a war driving energy prices higher, AI uncertainty and more — where spending growth is concentrated in a single cohort that could pull back sharply with a market downturn.
- Low-income households have been squeezed by inflation running persistently above the national average, leaving them with little buffer against any additional shock.
What they're saying: "Reliance on a single segment of the economy has important implications for spending growth and its fragility, as well as for economic vulnerability and policy," New York Fed researchers wrote in a blog post.
The big picture: Since January 2023, real retail spending has grown at an uneven pace across income groups, according to the New York Fed data.
- High-income households — those earning more than $125,000 annually — saw cumulative real spending growth of about 7.6% through March 2026.
- Middle-income households gained about 3%. Low-income households, earning under $40,000, gained just over 1%.
Zoom in: Before the COVID-19 pandemic, lower-income households actually outpaced the wealthy in spending growth. The divergence opened in 2023 after pandemic-era relief programs for lower- and middle-income households ran out.
- Researchers say that the split has been sustained, and "the recent growth in retail spending has been mostly due to the high-income households."
- The New York Fed data shows real spending has turned negative across all income groups in recent months, even as the gap between high- and low-income households persists.
The intrigue: Wage growth has been mixed across income groups, making it an incomplete explanation of the K-shaped dynamic. The New York Fed points to wealth and inflation as the more powerful drivers.
Strong consumer spending among the richest consumers is helped by huge asset returns.
- Since 2023, the real net worth of the top 1% of earners has climbed more than 25%, fueled largely by surging financial assets, while the middle 40% of households has gained less than 10%, the New York Fed finds.
- "The substantial role played by financial assets raises questions regarding the potential vulnerability of retail spending to a financial market correction," New York Fed researchers wrote.
What to watch: As we wrote earlier this year, economists have cast doubt on the K-shaped narrative.
- For instance, Pantheon Macroeconomics argued that the wealthiest households have accounted for a roughly stable 40% share of total consumer spending for 25 years, a finding that doesn't necessarily contradict New York Fed research.
- But it cuts at a more pressing question: whether the economy's reliance on a single cohort is a new vulnerability or a long-standing norm of American consumption.
