The closing of the U.S. economy's K-shaped gap
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Screenshot: Bank of America
For years, America's economy has been defined by a "K-shaped" gap: The rich kept spending at a rapid pace, while everyone else struggled to keep up.
- That divide is suddenly narrowing.
Why it matters: Economists warned that consumer spending growth was increasingly reliant on wealthy Americans, leaving the economy vulnerable to a stock market downturn or any other wealth shock.
- Importantly, the "K" appears to be closing from the bottom up, meaning that lower- and middle-income Americans are catching up, rather than affluent households pulling back.
- That could put consumer spending on a more resilient footing.
Zoom in: Bank of America is calling it the "great convergence."
- The bank's data shows spending and wage growth among its customers has converged across income groups since May.
- Spending growth among lower-income households hit 5.4% year over year, slightly exceeding the 4.9% rate among middle-income households.
- Lower-income Americans are also seeing stronger pay gains: After-tax wages rose 5.2% in July from the same period a year ago, surpassing the wage growth rate for higher-income households for the first time since December 2024.
The big picture: PNC said Monday that the gap between spending growth among its richest and poorest account holders shrank to just 0.1 percentage point in July, from a peak of 5 percentage points last year.
- The bank says the shrinking gap largely reflects an improving labor market: More lower-income households are working and collecting paychecks, giving them more room to spend.
"From our perspective, through all the various dimensions, there's not like that much there in terms of support for the K-shape narrative," JPMorgan Chase chief financial officer Jeremy Barnum told investors last month.
The intrigue: The White House is seizing on the shift. Treasury Secretary Scott Bessent told CNBC last week that "the K-shaped economy is over," arguing that lower-wage workers are finally catching up.
- Even if the transaction data shows the gap closing, declaring the "K" is over may ring hollow for Americans who still say they feel bad about the economy.
- Economic sentiment among lower-income Americans is improving, though it still lags those in the higher-income cohort by 12 points, according to the latest University of Michigan data.
And the very richest Americans appear to be the convergence exception.
- Spending growth among the top 5% continues to outpace everyone else, even as their wage growth has cooled, Bank of America says.
