Why a K-Shaped US Economy Is Raising Red Flags

Summary

Podcast Summary: The Big Take – "Why a K-Shaped US Economy Is Raising Red Flags"

Podcast: The Big Take by Bloomberg and iHeartPodcasts
Episode: Why a K-Shaped US Economy Is Raising Red Flags
Date: November 10, 2025
Host: Sarah Holder
Featured Guests: Economist Peter Atwater, Bloomberg Reporter Katerina Sareva

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Episode Overview

This episode explores the phenomenon of the "K-shaped" US economy—a metaphor capturing a sharp divide between the economic fortunes of the wealthiest Americans and everyone else. Host Sarah Holder, joined by economist Peter Atwater and Bloomberg reporter Katerina Sareva, investigates how this split manifests across consumer spending, corporate earnings, and the structural health of the US economy. The conversation unpacks both the roots and current realities of the K-shaped recovery, its increasing severity, and the risks this poses for long-term economic stability.

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Key Discussion Points & Insights

1. Defining the K-Shaped Economy

• Origin of the Concept

  • Peter Atwater first described the “K-shaped” economy in 2020, observing the divergent recovery trajectories post-COVID-19 (02:09).
  • Instead of a uniform V-shaped or even U-shaped recovery, the economy split: those at the top flourished while those at the bottom suffered losses.

• What the “K” Represents

  • Atwater: “We should have hoped for a V-shaped recovery... Instead we got a K.” (02:18)
  • Katerina Sareva explains the visual: “If you think about the letter K, it has a vertical line... and then two lines kind of diverging from the center of that vertical line.” (02:46)

2. The Widening Divide: Data and Realities

• Post-COVID Recovery

  • Early COVID: White-collar workers quickly gained confidence by adapting to remote work, while blue-collar and essential workers’ confidence declined (04:21).
  • Sareva: “People with wealth and people with jobs where they could work from home... were doing really well. Now the other half... really wasn't.” (04:50)
  • Unemployment at the end of 2020 remained high for the lower-income group, despite market recovery.

• Shift in Wage Growth & Wealth Accumulation

  • Initially, lower income workers benefited as the labor market rebounded. Recently, wage growth has flipped to favor high earners, mirroring the stock market's surge (06:05).
  • Sareva cites research: “Each additional dollar of stock market wealth raises consumption by about 5 to 15 cents.” (06:10)

3. K-Shaped Patterns Across Industries

• Housing Market

  • Wealthier individuals benefit from rising home prices and stock values, allowing them to move up; lower-income individuals struggle to enter the market (06:52).

• Travel and Airlines

  • Premium travel experiences thrive (legacy airlines, international flights, luxury hotels), while budget carriers like Spirit struggle and even face bankruptcy (06:52-07:57).

• Food & Hospitality

  • Higher-end fast-casual restaurants falter as middle-class consumers "trade down" to cheaper options like McDonald’s, which reports steady growth (08:02).

• Consumer Behavior at the Bottom

  • Lower and middle-income households increasingly use coupons, buy cheaper brands, and stretch products to limit spending. Example: shoppers switching laundry detergent types to save (09:04).

4. Misleading Macroeconomic Health—and Hidden Fragility

• Aggregate Numbers versus Underlying Reality

  • Sareva: “We had stronger economic growth this year than most people thought... It's just when you look under the hood, you realize that it's really being driven by a small number of people.” (09:44)
  • Top 10% of earners now account for nearly 50% of consumer spending, up from 35% in the early 1990s (10:16).

• A Fragile Foundation: The Jenga Analogy

  • Atwater likens the economy to a Jenga tower: “So much is happening financially at the top... Meanwhile below, it is becoming more and more fragile.” (11:33)
  • A shock impacting high-income consumers (e.g., a stock market decline or disillusionment with AI) could ripple downward and destabilize the entire system (12:36).

5. Policy and Structural Challenges

• Government Response & Policy Stalemate

  • Immediate interventions (like SNAP benefits) are disrupted by government shutdowns; substantial federal-level reforms (tax code, capital gains, estate taxes) face strong political resistance (13:28-14:33).
  • Sareva notes: “We just had a massive tax reform package... that was perhaps more helpful to higher income and corporations.” (13:50)

• Inequality at the Core

  • The K-shape measures inequality, but also “stacked vulnerability”:
    • Atwater: “For those at the bottom, they have scarcity in education, in health care, in child care, in job opportunity. They have what I call stacked vulnerability, where the economic piece is just one more thing. And at the same time, those at the top have overabundance in everything.” (15:07)
  • Widening inequality can slow overall growth and spark social unrest.

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Notable Quotes & Memorable Moments

• On the K-shape’s Metaphor:

  • Peter Atwater: “We should have hoped for a V shaped recovery... Instead we got a K.” (02:18)

• On Wealth Accumulation and Consumption:

  • Katerina Sareva: “Each additional dollar of stock market wealth raises consumption by about 5 to 15 cents.” (06:10)

• On Economic Fragility:

  • Peter Atwater: “Invincible markets are incredibly fragile. As confidence falls, scrutiny will intensify.” (12:36)

• On Inequality’s Compounding Nature:

  • Peter Atwater: “They have what I call stacked vulnerability... at the same time, those at the top have overabundance in everything: power, money, influence.” (15:07)

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Timestamps for Major Segments

• Introduction to the K-Shaped Economy – 01:48–03:18
• COVID Recovery and Initial Divergence – 04:21–05:31
• How the K Shape Shows Across Industries – 06:41–08:47
• Behavioral Frugality Among Lower Incomes – 09:04–09:44
• Rising Fragility and the Jenga Tower Analogy – 11:17–12:36
• Policy Responses and Structural Inequality – 13:28–15:07

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Conclusion

The episode delivers a rich analysis of the US economy’s worrisome path: an ever-widening gap between rich and poor, increasingly visible in everything from shopping habits to macroeconomic numbers. The K-shaped metaphor has spread across financial reporting, signaling both immediate urgency for policymakers and a warning for the economy’s future stability. This is not merely an economic divergence but also a compounding of vulnerabilities with potentially profound social, political, and financial consequences.

Transcript

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[Bloomberg Reporter]

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[Sarah Holder]

If you squint at enough data about the US Economy right now on income and spending and consumer confidence, there's a shape that starts to emerge. A letter the letter K A K.

[Peter Atwater]

Shaped economy is the result of a bifurcation in consumer confidence.

[Sarah Holder]

Economist Peter Atwater is responsible for popularizing the idea of a K shaped economy in 2020 during the global COVID pandemic.

[Peter Atwater]

We should have hoped for a V shaped recovery coming out of COVID where all ships rose together, even a U shaped recovery where there's a delay in the recovery, but ultimately it all rises together.

[Sarah Holder]

But we didn't get a V. We didn't get a U. We didn't even get an L where things stayed bad for everyone. Instead we got a K. So if.

[Bloomberg Reporter]

You think about the letter K, it has a vertical line, obviously, and then two lines kind of diverging from the center of that vertical line.

[Sarah Holder]

That's Bloomberg reporter Katerina Sareva and the divergence she and Peter are talking about is a split in the paths of Americans at the top and bottom of the US Economy with the fortunes of those at the top rising and and those at the bottom getting worse. That's how the economy looked during the recovery from COVID and it's how it looks again now today.

[Bloomberg Reporter]

Fast forward to 2025. We're again talking about the K shape because we are seeing kind of a return to that. We're seeing consumer spending really slow down for folks at the lower ends of the income spectrum while rich folks are doing really well.

[Sarah Holder]

And this time around, the two sides of that K are getting even farther apart. I'm Sarah Holder and this is the big take from Bloomberg News. Today on the show, a tale of two economies. Why the gap between America's wealthiest and everyone else is widening, how it's showing up in company earnings reports and what the K shape means for the country's overall financial health. Economist Peter Atwater studies confidence and how it impacts consumers decision making. That's what originally drove him to recognize this K shaped pattern.

[Peter Atwater]

Early on in Covid I saw as white collar workers, their confidence immediately popped when they could work from home. On the other hand, blue collar workers, factory workers, hospital workers, their confidence kept deteriorating. And so based on that divergence in confidence, I expected that the economy would follow.

[Sarah Holder]

And Bloomberg's Katerina Sareva says it did follow.

[Bloomberg Reporter]

You had one group of people that were kind of in the upper echelons of the economy. So think like high income earners, people, people with a lot of wealth, and those people were really doing well. The stock market was rising a lot already by the end of 2020. So people with wealth and people with jobs where they could work from home, for example, were doing really well. Now the other half of the economy really wasn't. We still had like 11 million people unemployed at the end of 2020, the unemployment rate was above 6%. So for anyone who didn't have stocks, for example, maybe didn't own a home, things were not going great.

[Sarah Holder]

Eventually the government rolled out stimulus programs, lockdowns lifted, and companies started rehiring workers again.

[Bloomberg Reporter]

And that especially benefited the lower income folks because those were the people that had the most impact from the pandemic layoffs. So when you had companies trying to hire them again for a lot of these service industry jobs that had to shutter in the pandemic, you saw big wage gains. That has changed now and in fact it has reversed. The the largest wage increases right now are for the Highest income earners.

[Sarah Holder]

Those high earners are also the people who tend to be making the most from the stock market.

[Bloomberg Reporter]

It's been just surging this year. So that obviously gives people confidence. There's research showing that each additional dollar of stock market wealth raises consumption by about 5 to 15 cents. And then not just the stock market. You, you know, you also have to look at wealth that's been created through home ownership. Again, something that disproportionately impacts wealthier people. And home prices have just increased so much over the past five years. That also helps people feel like they can spend more.

[Sarah Holder]

Would you say that there's a capital K shaped economy and then there's other lower K shaped economies sort of playing out in other sectors like the housing market?

[Bloomberg Reporter]

Yeah, absolutely. We're really in a moment where it's becoming a really popular metaphor, I think, and it's being used across a variety of industries. So yeah, you can look at home buying where, you know, things are going really well for that upper part of the market because again, folks are able to sell their homes and are able to have more wealth through the stock market so they can go buy a bigger home and not as much at the lower edges. I've heard it talked about, for example, if you're looking at how airlines are performing right now, so you look at the legacy carriers like the big American Airlines, Delta, they're doing really well. And they're reporting that high end consumers, business travelers, for example, are spending. People are flying internationally, even if maybe not as much domestically. Right. So they're still seeing a lot of revenue from that. And then some of the smaller, like the low cost carriers, in some cases like Spirit filing for bankruptcy, really not doing well. So it's an interesting dynamic that I think is playing out in a lot of different areas.

[Sarah Holder]

You can see a similar trend in the food and hospitality industries too.

[Bloomberg Reporter]

So you have some of these fast casual places that are a bit more expensive. Right. Like not the cheapest option out there, really not doing well. And then restaurant chains like McDonald's reporting that they're doing okay because they're getting a lot of these consumers, consumers that would be going to somewhere like Chipotle or Sweetgreen, for example, now kind of trading down to something like a McDonald's. You're also definitely hearing corporations talk about how their luxury consumers are really supporting their growth. Hearing this from the hotel chains, also hearing this from Ethan Allen, the furniture company, that on the higher, higher end, they're still seeing a robust consumption there. And then that's supporting kind of the rest of their business.

[Peter Atwater]

Businesses have found a way to cater to this divergence.

[Sarah Holder]

Economist Peter Atwater again, meanwhile, for those.

[Peter Atwater]

At the bottom, it's becoming a monthly, if not now weekly exercise in juggling their finances.

[Sarah Holder]

The Atlanta Fed has reported that some shoppers are shifting to liquid or powder laundry detergent instead of using pre portioned pots so they can ration it out in smaller amounts. The grocery chain Kroger has found that lower and middle income shoppers are using more coupons and buying cheaper brands. People are trying to find ways to spend less. But the thing about a K shaped economy is that even as the top and bottom are getting further apart, looking at the big picture can be misleading. Because when it comes to overall spending or overall growth, the economy looks like it's doing okay.

[Bloomberg Reporter]

We had stronger economic growth this year than most people thought we would. We have a pretty low unemployment rate still, right? Like 4.3%. Things still look really good. It's just when you look under the hood, you realize that it's really being driven by a small number of people. This is important because the US Economy, we're a consumer economy. Two thirds of economic activity in the US is driven by the consumer. So when you start to concentrate that in an increasingly small, smaller number of people, it just means you have a more fragile system.

[Sarah Holder]

In the early 90s, the top 10% of earners accounted for about 35% of the country's consumer spending. Today they account for nearly 50%. And as the economy gets more top heavy, it also becomes more fragile. What are the consequences? That's after the break.

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[Sarah Holder]

We've talked a lot about how the current economy is bifurcating, splitting with the wealthy and everyone else on separate tracks moving away from each other the letter K. But economist Peter Atwater has another image to consider. A Jenga tower.

[Peter Atwater]

I feel like the blocks in the Jenga tower, particularly at the very foundation, are being pulled away at the top. So much is happening financially and that would be okay if there was some level of robustness at the bottom, that if the K really represented strength at the top and the bottom. But what we have now is all of this oversized activity at the very top. Meanwhile below, it is becoming more and more fragile.

[Sarah Holder]

In October, Fed Chair Jerome Powell said that this bifurcated economy is something he's watching very, very carefully. And Peter's watching closely too. He believes that if something causes the wealthiest consumers to pull back on spending, say a big decline in the stock market, it could send the Jenga blocks toppling.

[Peter Atwater]

We think of these markets as being representative of strength. And as a researcher, what I know is that invincible markets are incredibly fragile. And as confidence falls, scrutiny will intensify.

[Sarah Holder]

One area that Peter thinks is especially vulnerable to scrutiny right now, AI.

[Peter Atwater]

I think what it would take to topple is a relatively small event that challenges the confidence in AI. Individuals will challenge the benefits of all of this AI abstraction and demand immediate, tangible results that it does not appear that it can yet deliver.

[Sarah Holder]

So what would it take to bolster the Jenga Tower's foundations and to start narrowing the diverging parts of the K? It's no easy task. The government shutdown has put new immediate strains on lower income Americans with snap benefits on hold. And longer term fixes haven't found much political momentum. And at least at the federal level.

[Bloomberg Reporter]

Things like, you know, reforming the tax code, looking at things like the capital gains tax, which really is very low in this country. Right. Looking at things like the payroll tax, estate tax, corporate tax rates. Right. There's a lot of ways that you could change tax law to make it more progressive. I think economists would argue, I don't know right now how widespread of support there is for doing things like that at the federal level. Right. We just had a massive tax reform package go through that in some ways was kind of the opposite of what we're talking about. That was perhaps more helpful to higher income and corporations.

[Sarah Holder]

Is a K shaped economy just a euphemism for an unequal economy? Is the K just measuring inequality?

[Bloomberg Reporter]

Yeah, absolutely. We talked to some economists who noted that inequality, it's not new for the U.S. economy. Right. We've had widening inequality for decades here. But widening inequality, when it gets to levels like what we're seeing right now, tends to not be good for an economy because what it can mean is that you can actually have slower growth and it can even lead to things like social unrest.

[Peter Atwater]

It's not just inequality in terms of an economic sense of this is inequality in multiple dimensions at once. Because for those at the bottom, they have scarcity in education, in health care, in child care, in job opportunity. They have what I call stacked vulnerability, where the economic piece is just one more thing. And at the same time, those at the top have overabundance in everything. Power, money, influence. And so it's become very difficult for those at the bottom to ignore what's happening around them.

[Sarah Holder]

This is the Big Take from Bloomberg News. I'm Sarah Holder. To get more from the Big Take and unlimited access to all of bloomberg.com, subscribe [e-mail] podcastoffer if you like this episode, make sure to follow and review the Big Take. Wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow.

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