Treasury Secretary Scott Bessent recently declared that the K-shaped economy “is over.” New research says he might be right.
After a prolonged period of sharp divergence between higher and lower-income household spending and earning patterns — dubbed the K-shaped economy because higher earners have continued to spend, forming the top branch of the K, while lower earners, the bottom of the K, pulled back — the gap is beginning to narrow again, economists at the Bank of America Institute led by David Tinsley wrote in a report last week.
“As of July, spending and wage growth have largely converged across income cohorts, with the exception of the top 5% of earners, who continue to outpace the rest,” the report said.
Debit and credit card spending across all income levels was up 5% in July from a year ago, with lower-income households showing a 5.4% gain. Middle-income earners, meanwhile, spent 4.9% more than last year.
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Strong wage gains among lower and middle-income earners may explain why the gap is closing: Lower-income consumers saw their after-tax wages jump 5.2% in July from a year earlier, while middle-income earners saw a 4.2% increase.
“These gains in wage growth have left lower- and middle-income households looking more ‘balanced,’ with a narrower gap between spending and wage growth,” the report said. “In fact, that gap has effectively disappeared for lower-income households.”
Still, even as low- and middle-income earners close some of the spending gap, they still can’t compete with the top 5% of earners, who continue to spend even though their earnings aren’t growing as quickly. Many high earners feel comfortable spending because they have significant equity investments and have benefited from the S&P 500’s (^GSPC) nearly 20% gain from July 2025 to 2026.
Higher-income households’ spending growth on items like plane tickets, clothing, and lodging still significantly outpaces that of lower-income households, although the lower-income group has begun to close some of that gap in the past six months.
“The current closing of the ‘K’ is, in our view, likely a positive for overall consumer spending,” the report said. “This is particularly the case as the convergence in spending growth appears to be largely upwards, with lower- and middle-income households narrowing the gap towards higher-income peers.”
Claire Boston is a Senior Reporter for Yahoo Finance covering housing, mortgages, and home insurance.
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