The K-shaped economy, in one chart

The idea of a “K-shaped recovery” — relatively affluent Americans doing well, while those lower on the income spectrum struggle mightily — was in vogue as the US economy emerged from its Covid-induced recession in 2020.

A few years of better wage growth for lower earners helped put a dent in this trend, but now, the “K-shaped economy” is back in a big way:

Liz Everett Krisberg, head of the Bank of America Institute, and senior economist David Michael Tinsley wrote in a new report (emphasis ours):

“The labor market slowdown appears to be impacting lower-income households, in particular. According to Bank of America deposit data, after-tax wage and salary growth slipped to just 0.9% year-over-year (YoY) for lower-income households in August — the smallest gain since the start of the series in 2016. Wage growth for higher-income households, on the other hand, rose to 3.6% YoY, the highest growth rate since November 2021. This growing divergence between income cohorts is also reflected in spending trends, with credit and debit card spending growth easing for lower-income households but accelerating for higher-income ones.”

Deteriorating labor market outcomes for lower-income and traditionally marginalized groups sucks. Full stop.

From a macroeconomic perspective, however, remember that the top 40% of earners drives over 60% of US consumer spending. That means any easing of nominal consumption growth at the lower end of the income scale can be more than offset by a similar-sized pickup in spending growth at the upper end.