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It all began with an anonymous Twitter handle named \u201cIvan the K.\u201d The self-appointed \u201cLead Independent Director of Finance Twitter\u201d had a dark theory in the depths of the pandemic. In 2020, they asked the universe, \u201cWhy is no one talking about a K recovery?\u201d since there was much discussion at that time about an economic bounceback in the shape of either a U, an L, or, most bullish of all, a V. \u201cSome things will bounce back,\u201d Ivan wrote, \u201csome will not recover. Think about it.\u201d<\/p>\n
Economists seem to have thunk on it and agreed: The K is real. It bears similarities to another saying, invented nearly 200 years earlier by the great English romantic poet Percy Bysshe Shelley: \u201cThe rich get richer, the poor get poorer.\u201d\u00a0<\/p>\n
This is also called \u201cthe Matthew effect,\u201d as some trace the sentiment all the way back to the bible\u2019s Book of Matthew 25:29: \u201cFor to everyone who has, more will be given, and he will have abundance; but from the one who does not have, even what he has will be taken away.\u201d<\/p>\n
If you ask Mark Zandi, chief economist for Moody\u2019s Analytics, this old-time religion got a new lease on life in the Reaganomics of the 1980s. \u201cYou really start to see this in the Reagan era,\u201d Zandi told Fortune. \u201cThat\u2019s when you get a structural divergence between productivity growth and median wage growth.\u201d\u00a0<\/p>\n
Zandi argued many elements combined then to weaken labor in favor of capital income: globalization, the decline of unions and manufacturing and major tax reforms. \u201cThe share of national income going to labor has been trending down since the early 1980s,\u201d he said, \u201cand the share going to capital owners\u2014those who already have wealth\u2014has gone up.\u201d<\/p>\n
So what is it about 2026, six years after the pandemic severed something economically, that accelerated both sides of the \u201cK\u201d for the wealthy and the poor?<\/p>\n
Data doesn\u2019t lie<\/p>\n
First, consider the extraordinary surges in economic data seen, halfway through the 2020s. The stock market rallies have led to several record highs in 2025, incentivizing the (wealthier) Americans with money in the markets to loosen their purse strings. But the bottom half of the K is extending downwards, with fast-casual restaurants like Chipotle and Cava, and fast-food joints like McDonald\u2019s, noting that lower-income customers, especially young people, are pulling back and preferring to dine at home.<\/p>\n
Zandi\u2019s own research has turned up some stunning results, notably that in the second quarter of 2025 the top 10% of wealthiest Americans were responsible for a whopping 49% of consumer spending. That means the economy has grown so lopsided\u2014or K-shaped\u2014that the richest Americans are responsible for half the economy. The K-shape is creating the illusion in economic data that despite sticky inflation and tariff-related sticker shock, consumer spending remains \u201cresilient.\u201d\u00a0<\/p>\n
Morgan Stanley Wealth Management\u2019s Lisa Shalett has increasingly been sounding the alarm from her perch as chief investment officer. She told Fortune in an October 2025 interview \u201cthe income inequality stuff is really getting like completely wackadoo,\u201d specifically citing Zandi\u2019s research: \u201cThat means 90% of the country is only half the consumption, I mean holy cannoli.\u201d\u00a0<\/p>\n
Shalett covered the K-shaped economy specifically in a November 2025 research note, in the context of whether 2026 marks an early or late stage of the economic cycle for investors. \u201cDecoding this conundrum may hinge on the so-called K-shaped economy,\u201d she wrote, \u201ca concept that captures the widening chasm between the \u2018haves\u2019 and \u2018have-nots.\u2019\u201d<\/p>\n
Then Shalett said the situation is actually even worse than what Zandi produced: \u201cFor the U.S. consumer, wealth concentration has produced a situation where the top 40% of households by income account for approximately 60% of all spending; those households, in turn, control nearly 85% of America\u2019s wealth, two-thirds of which is directly tied to the stock market, which has climbed more than 90% in three years.\u201d She calculated that spending by the wealthiest households was growing 6x-7x faster than for the lowest cohort.\u00a0<\/p>\n
Even Federal Reserve chair Jerome Powell talked about seeing the pattern at last December\u2019s Federal Open Market Committee meeting. \u201cWe hear about this a lot,\u201d Powell said. \u201cIf you listen to the earnings reports for consumer-facing companies that tend to deal with low- and moderate-income people, they\u2019ll all say that we\u2019re seeing people tightening their belts, changing products that they buy, buying less, and that sort of thing. And so it\u2019s clearly a thing.\u201d<\/p>\n
When did the K-shaped economy emerge?<\/p>\n
The concept of a bifurcated economy has been baked into American society longer than even the days of Reagan, according to Tyler Schipper, associate professor of economics at the University of St. Thomas.<\/p>\n
\u201cThere\u2019s this underlying thing that has been true for decades and decades and decades,\u201d Schipper told Fortune. \u201cNumber one, lower income households always struggle more in the economy. They tend to be more impacted by price changes because they\u2019re spending a higher percentage of their income.\u00a0<\/p>\n
\u201cAnd second, that it tends to be that after each recession, lower income workers fall further behind in the income distribution,\u201d he added.<\/p>\n
Today, conversations around the shape of the American economy are more urgent because more of the middle class\u2014and those making about $100,000 per year\u2014are getting pushed into the lower half of the K, Schipper said. This can be seen in mid-income and higher-income earners flocking to discount retailers like Walmart and Dollar General. It can even take on more absurd forms, with \u201cRalph Lauren Christmas\u201d trending at unprecedented levels during the projected $1 trillion 2025 holiday season, but TikTok and Instagram full of tips on how to achieve the look of red-tartan-plaid and cozy sweaters on a budget\u2014in other words, not at an actually expensive Ralph Lauren store.\u00a0<\/p>\n
Why is this happening?<\/p>\n
That lower half of the K is extending ever downward as the consumer encounters a unique set of challenges, including the inflationary impact of tariffs, according to Schipper. Lower-income households tend to spend more on essential goods more likely to be impacted by tariffs. The Yale Budget Lab calculated that the levies impact the bottom of the income ladder more than three times more than the top.<\/p>\n
A low-fire, low-hire labor market has also contributed to evidence of a two-tiered economy, said Claudia Sahm, chief economist at New Century Advisors and a former Federal Reserve economist. While tech layoffs have been top of mind following massive cuts from Amazon, layoff rates are still low, Sahm told Fortune, meaning if you have a job, you may feel more financially secure. If you\u2019re just entering the job market like Gen Z is, you may have a hard time finding a job as firms contract following a post-COVID hiring spree, and as AI begins to displace entry-level jobs. To be sure, January 2026 data from Challenger, Gray & Christmas found U.S. employers cut more than 108,000 jobs in January, the largest January reduction since 2009.<\/p>\n
But another part of the resurgence of discussions about a bifurcated economy comes from the relative nature of a K-shaped economy, according to Schipper. While the economy has historically been two-tiered, diverging consumer sentiment has also contributed to a narrative that two income groups are moving away from each other.\u00a0<\/p>\n
For example, in 2022 when the stock market declined, consumer sentiment in both the top-third and bottom-third of income levels converged, according to data from the University of Michigan\u2019s Survey of Consumers. A similar pattern occurred last April, when the announcement of Liberation Day tariffs spooked Americans across income levels, Schipper noted. Last year, however, consumer attitude toward the economy saw a greater split, with low-income Americans feeling far less confident about the economy than those high-income, a trend continuing into 2026.<\/p>\n
How monetary policy created the two-tiered economy<\/p>\n
Some economists point to the widening divide between the rich and the poor as a consequence of monetary policy. The Fed, over the past few years, has had a historic tightening cycle\u201411 rate hikes between 2022 and 2024\u2014which was meant to pare down inflation. However, it also reinforced the split since wealthy households, flush by years of asset appreciation, could weather the slowdown better than lower income households facing higher mortgage rates and shrinking credit, Zandi said.<\/p>\n
Cheap money in the 2010s and early pandemic years boosted stocks and home values, but the 2022-and-on tightening squeezed borrowers and renters without necessarily reversing those gains. That means even as inflation has cooled, the damage lingered as asset holders retained their windfall but wage earners bore the brunt of disinflation.\u00a0<\/p>\n
\u201cFolks in the top third of the income and wealth distribution are doing well, but the remaining two-thirds of Americans are struggling\u2026 they borrowed during the pandemic when rates were low, and now they\u2019re having to pay on that debt at a higher rate,\u201d Zandi said.<\/p>\n
How can the economy become less bifurcated?<\/p>\n
Though Fed chair Powell has acknowledged today\u2019s K-shaped economy, a more restrictive monetary policy is helping keep it in place, Sahm argued, making it unlikely for the two diverging K lines to come any closer together.<\/p>\n
\u201cWe have a Fed that\u2019s still trying to fight inflation that\u2019s been elevated, and part of the tool that they have for fighting inflation is interest rates are elevated, and they\u2019ve been elevated for some time,\u201d Sahm said. \u201cThis is the way restrictive monetary policy works: It\u2019s going to hit households hardest who are more financially constrained.\u201d<\/p>\n
Zandi had a different perspective. He argued the gap will require policy changes far beyond the Fed\u2019s remit.<\/p>\n
\u201cThe Fed can\u2019t fix the K-shaped economy,\u201d he said. \u201cIt can only stabilize prices and employment. The distributional effects are up to fiscal policy.\u201d Instead, Zandi argued for a reversal of some choices made on the fiscal side that would \u201cdo no harm\u201d to lower-and-middle-income Americans.<\/p>\n
\u201cDon\u2019t impose tariffs\u2014that exacerbates inequality,\u201d he said. \u201cLower- and middle-income households spend a much higher share of their budget on imported products like food, clothing, and cars.\u201d\u00a0<\/p>\n
He also criticized President Donald Trump\u2019s \u201chighly restrictive\u201d immigration policy, which he said hurts jobs for industries that rely on immigrants, such as construction, agriculture and manufacturing broadly.\u00a0<\/p>\n
Beyond just addressing self-inflicting wounds, Zandi argued that progress depends on both structural and cyclical forces: raising productivity through education, broad-based jobs creation, and ensuring that gains from AI will be equally shared. \u201cIf the benefits of AI are distributed more broadly,\u201d he said, \u201cand if job losses are offset by new opportunities, we\u2019ll be fine.\u201d<\/p>\n
What\u2019s so bad about a K-shaped economy?<\/p>\n
Clear evidence of a two-tiered economy doesn\u2019t mean a recession is imminent, economists said. It does, however, mean that if economic indicators were to take a nosedive, the risk of a recession would increase.<\/p>\n
\u201cThe K-shaped economy, the bifurcated economy, is potentially a more vulnerable economy,\u201d Sahm said.<\/p>\n
Though layoff rates are still relatively low, if the rate of job cuts increased, there would be many more people in a job market where there\u2019s not much hiring. The labor market today doesn\u2019t look like it did in the job-hopping era of 2023, even when interest rates were still high, Sahm noted. Right now, only the healthcare and hospitality sectors are adding jobs in earnest, creating a concentration of growth not optimal for economic stability.<\/p>\n
\u201cAnytime you have that, you\u2019re more vulnerable if something bad happens,\u201d Sahm said.<\/p>\n
A version of this story was published on Fortune.com on Nov. 7, 2025.<\/p>\n
More on the K-shaped economy:<\/p>\n
Welcome to the \u2018E-shaped\u2019 economy: Wealth gap is no longer between just high and low earners, the middle class is also struggling<\/p>\n
McDonald\u2019s newest $3 value menu is sounding an alarm about America\u2019s K-shaped economy<\/p>\n
Economist behind K-shaped economy sees a \u2018sea of despair\u2019 for the bottom 90% and a \u2018crisis of confidence\u2019 in the American dream<\/p>\n
#Kshaped #economy #rich #richer #poor #struggling<\/p>\n","protected":false},"excerpt":{"rendered":"
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