Market Update: The K-shaped economy | The Week – Full Analysis

What is a K-shaped economy?

It’s a term used by a growing number of economists to describe the two-lane scenario they see playing out in the U.S., in which higher-income
households on the upward arm of the K see their wealth increase while lower-income families are squeezed by stagnating incomes and rising prices. At a broad level, the economy appears healthy, with unemployment hovering at just over 4%, inflation edging down from a pandemic-era peak of 9.1% to about 2.5%, and stock markets hitting record highs. President Trump says Americans are living in a “golden age,” but many don’t feel it. Most industries are in a hiring freeze. Borrowing costs remain high. Inflation remains above the Federal Reserve’s 2% target. And because the top 10% of Americans own 87% of stocks, few people have directly benefited from soaring share prices. Fed data shows the share of wealth held by the richest 1% hit nearly 32% last year, the highest since records began in 1989. The worry with income inequality “is not just where we stand now,” said Beth Ann Bovino, chief economist at U.S. Bank, “but also whether ongoing developments will worsen the situation.”

Rising wealth inequality has been a fact of American life since the 1980s. But it accelerated sharply during the Covid-induced 2020 recession, when white-collar professionals remained employed and worked from home—saving money that would have been spent on commuting, vacations, and more—while mass layoffs at restaurants, hotels, and factories pushed unemployment to 15%. Inequality shrank somewhat when the economy reopened and demand surged, with many now short-staffed companies lifting pay for traditionally low-income jobs. In 2023 and 2024, inflation-adjusted wages for the bottom quarter of workers climbed at 3.9% a year, outpacing the top quarter’s 3.1%. “We had that kind of two-year period where the bottom was catching up,” said Dario Perkins, an economist at consultancy TS Lombard. “Since then, the economy has cooled down again.” Hiring has dropped over the past year, as have pay hikes—for some. After-tax wage growth ticked up 4% year on year for higher-income households, according to a new Bank of America report, but climbed just over 2% for middle-income families and 1.4% for lower-income families. For many in the middle and lower tiers, simply staying afloat now feels like a struggle.