Is the K-shaped economy real?

Summary

Unhedged – "Is the K-Shaped Economy Real?"

Podcast: Unhedged (Financial Times & Pushkin Industries)
Episode Date: November 13, 2025
Hosts: Katie Martin (FT Markets Columnist, London), Robert Armstrong (Unhedged Newsletter, NY)

Episode Overview

This episode tackles the much-discussed "K-shaped economy": the idea that, post-pandemic, economic recovery and growth have split along lines of wealth, with affluent individuals and major stocks (especially tech) surging ahead (the upward leg of the "K") while lower-income individuals and other market segments lag behind (the downward leg). Katie and Rob separate fact from narrative, considering whether this idea holds up under scrutiny, and what it really means for consumers, companies, and policy.

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Key Discussion Points & Insights

1. What Is the K-Shaped Economy?

• The "K-shaped recovery" refers to a dramatic divergence:
  • The rich get richer and continue spending (and certain stocks soar)
  • Those on lower incomes or less successful sectors struggle or stagnate
• The metaphor is fashionable in both media and central banker circles.

[00:36] Rob Armstrong:
"It's this idea that one group of people—no prizes here for guessing, that's rich people—are holding up the economy. That's the pointy up bit of the K. While poorer people are scrimping and saving. That's the downward sloping bit."

2. Is It Really New?

• Pre-existing Wealth Inequality:
  • 96–98% of US wealth is held by the top half; the bottom half has "almost nothing."
  • This inequality is long-standing, not a sudden phenomenon.

[04:20] Katie Martin:
"If you look, the Fed studies this stuff very carefully and has something called the distributional counts that lay out the facts. But basically somewhere between 96, 98% of the wealth is owned by the people on the top half of the wealth spectrum. So basically half the people have all the money and the other half have almost nothing."

• Yet, companies report sharp divergence in consumer behavior:
  • Higher-end consumers keep spending; lower-income consumers cut back.

3. Confusing Data and Economic Contradictions

• Job Market vs. Economic Growth:
  • Unemployment is low, but job creation has slowed.
  • GDP continues to grow robustly, but new job openings are falling.
  • Consumer sentiment data: US consumers see a 23% chance of losing their job in the next five years, a record-high statistic (99th percentile since 1997).

[05:57] Rob Armstrong:
"People have an unusually high level of insecurity about their job and yet stock markets are just like, wahey, party time. So it's like something is wrong with this picture."

• This confusion feeds the K-shaped narrative, as people and markets try to reconcile conflicting data.

4. Is the Narrative Overblown?

• The K-shaped story is compelling, but is it oversimplifying?
• Not all companies' reports about stressed low-income consumers are reliable or unselfish narratives.
  • Executives might favor the K-shaped story to excuse poor performance.

[15:07] Katie Martin:
"I'm not saying these guys are making this story up. All I'm saying is you can see why an executive might lean into the K shape narrative rather than leaning into our product is not very popular."

5. Challenging the Wealth Effect Thesis

• Some economists and analysts (e.g., Dario Perkins of TS Lombard, Don White of Absolute Strategy Research) call out "wealth effect" explanations as unsubstantiated.
  • The rich, when richer, invest more than they spend (“low marginal propensity to consume”).
  • If spending were locked up with the rich, growth should be lower, not higher.

[11:32] Katie Martin:
"Everybody knows that the very rich, when you give them more money, they just invest it like they're consuming as hard as they can always ... their marginal propensity to consume is very low."

[14:48] Pushkin:
"But that's a story that a corporation can tell about why they didn't have a great quarter. That is not self-incriminating."

6. Psychology and Consumer Sentiment

• Much might come down to perceptions:
  • Post-pandemic, workers felt empowered (2022–2023); now, their optimism has faded.
  • Consumer caution may be as much about confidence and outlook as statistics.

[09:05] Katie Martin:
"It's not that things are so bad now, but that sense that the kind of deal between labor and management, as it were, had changed has faded and we're kind of back to the old days. And that may be weighing on people's psychology."

7. Markets, Policy, and Political Reality

• For markets, consumer confidence and job insecurity matter, but these aren't unprecedented concerns.
• For central banks (especially the Federal Reserve), their mandates mean they remain focused on unemployment and inflation, not directly on inequality—even though all policy has political implications.

[16:39] Katie Martin:
"If the rate of inflation is above target like it is now, and the rate of unemployment is still reasonably low, then if they were to say, look, poor people are suffering, we have to change our policy package here, they would be sort of exceeding their mandate."

• Political Relevance:
  • Both major US parties address affordability/inequality, even if markets and the Fed don't.
  • Policies like tariffs, direct checks, and affordability programs respond to these issues.

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Notable Quotes & Memorable Moments

• On the Narrative Machine:
  [06:31] Katie Martin:
  "I think part of the reason that the K shaped economy narrative has taken on so much momentum is that we are in an objectively confusing economy..."

• On Wealth Effect Skeptics:
  [10:49] Pushkin:
  "So yeah, there are people who are calling BS on this whole K shaped economy thing ... [Dario Perkins] said everyone in financial media is talking about wealth effects as a reason for the K shaped economy. Fact check. True."

• Corporate Spin:
  [15:07] Katie Martin:
  "...it's a lot easier story to tell than, well, actually we've been kind of letting things slip generally around here and we had a bad quarter and we screwed up in various ways."

• On Political Overlap:
  [19:05] Katie Martin:
  "The stuff we're talking to today, whether or not it's relevant to markets and how, you can be damn sure it's relevant to every politician."

• Running for President?:
  [19:28] Pushkin (joking):
  "Listeners, I don't know if you agree, but what I'm getting here is Rob Armstrong's going to run for President. Ladies and gentlemen, you heard it here first."

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Timestamps for Key Segments

• Definition & Framing of K-Shaped Economy: [00:36]–[02:00]
• Pre-existing Inequality & Corporate Narratives: [04:20]–[05:56]
• Job Market Paradoxes: [05:57]–[07:42]
• Role of Psychology/Consumer Perceptions: [09:05]–[10:48]
• Skepticism from Economists/Analysts: [10:49]–[13:40]
• Distinguishing Two K-Shape Claims: [13:40]–[15:37]
• What Does It Mean for Policy? [16:39]–[19:28]
• Political Relevance & Party Responses: [19:05]–[19:28]

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Long Short (Segment Recap)

• [20:51] Katie Martin: Long passive investing; points out how even elite hedge funds underperform index funds over time.
• [22:10] Pushkin: Short Lloyds using employees' personal data for pay negotiations, finding it disturbing and unfair.

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Conclusion

Katie and Rob ultimately argue that while inequality is real and parts of consumer behavior confirm a split, the current K-shaped narrative may be overstated or misapplied. The truly new aspect may be the shifting perceptions and uncertainty among households, not hard economic divergence. For markets and the Fed, the consequences are limited, but for politicians, these dynamics are increasingly central.

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Summary by: Unhedged Podcast Summarizer | Financial Times & Pushkin Industries

Transcript

[PGM Announcer]

At pgm, expertise across public and private markets today helps build resilient portfolios tomorrow. With over $1.4 trillion in AUM, PGM has navigated over 30 market cycles with active investing and disciplined risk management. But it's not just about the numbers. Our combined global expertise and local insights give us these strategic perspectives we need to help you reach your long term goals. PGUM Our investments shape tomorrow today.

[Pushkin]

Pushkin Markets and the US Economy are brought to you today by the letter K. You may have heard people talking about this lately. Even central bankers are saying it's a thing. It's this idea that one group of people no prizes here for guessing that's rich people are holding up the economy. That's the pointy up bit of the K. While poorer people are scrimping and saving. That's the downward sloping bit. It cuts across to markets too. We have a small group of stocks in the U.S. unsurprisingly, tech stocks that are screaming higher and the rest of the market is a bit meh. Now markets love this sort of thing. We have V shaped recoveries, L shaped recessions, and now all the cool kids are on about the K shaped economy. Today on the show we're asking whether that actually makes sense or whether markets people are just really proud of how well they know the Alphabet. This is Unhedged, the Markets and finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a markets columnist at the FT in London. Back from having lots of fun and slightly too much booze at Kilconomics in Ireland. And I'm joined down the line from New York City by His Excellency, the Very Reverend Robert Armstrong off of the Unhedged newsletter.

[Katie Martin]

Katie, I thought K shaped stood for Katie shaped to come. I don't know what that would mean exactly.

[Pushkin]

Quite short with curly hair. Now, Rob, before we get onto K shaped, our inbox has been bulging this week, has it not? A lot of correspondence about two things. Yes, firstly, contrary to the letter we got last week saying that I was too mean to you, we received lots and lots of emails from people saying I'm not too mean to you and that if I am mean to you, I should carry on being mean to you.

[Katie Martin]

Then there were two explanations. One was meanness is how the British express affection, as everyone knows. And the other was that I deserve mean treatment because I'm an interrupter. And I've fact checked both of these claims and I think they are true.

[Pushkin]

Yes, if it's any consolation, I can tell you from a weekend in Ireland that there's nothing that people in Ireland love doing more than. Than being mean to the Brits. So it's the circle of life goes.

[Katie Martin]

Yeah, it goes around, comes around, goes around.

[Pushkin]

The second point I've received a lot of correspondence on was making your own dishwasher tablets.

[Katie Martin]

Yes. What does he make them out of?

[Pushkin]

Well, so I asked him, but first.

[Katie Martin]

Of all, so we can edit this out later, I just have to hear.

[Pushkin]

He doesn't listen to this podcast, so I thought I would get away with it. But turns out his financial advisor does listen to this podcast and texted him saying, why are you making your own dishwasher tablets? So I had to admit that I brought it up here and I got a massive eye roll from Mr. Martin. Anyway, for those asking, the recipe is one of those stupid American cup measurements of bicarbonate of soda, one of citric acid powder, both of which are easy to buy online, and 1 tablespoon of washing up nitroglycerin. Do not buy nitroglycerin online or anywhere else washing up liquid. So you mix it up, you put it in an ice cube tray and then it will set. But, and I hate to admit it, but they do actually work.

[Katie Martin]

So should we talk about a serious topic now other than can we get back to the economy of America?

[Pushkin]

I suppose so tell me, Mr. Armstrong, about this K shaped thing and why everyone is going on about it.

[Katie Martin]

I think context is really important here because with these narratives that take on a life of their own, a lot of things tend to get confused in the enthusiasm for a simple and appealing story. So let's start with some context. The main thing is that in terms of what wealth, and I'm contrasting wealth to income here, the United States is massively unequal. So if you look, the Fed studies this stuff very carefully and has something called the distributional counts that lay out the facts. But basically 90, I don't know, 6% of the wealth, say somewhere between 96, 98% of the wealth is owned by the people on the top half of the wealth spectrum. So basically half the people have all the money and the other half have almost nothing. That is the picture in America now. What's important to remember though is that that is not new news. That is not something that just happened recently. So we have all these corporate executives right now I'm thinking of Procter and Gamble, Coca Cola, Chipotle, all of these companies have come out and said we're seeing a big divergence in behavior between well to do consumers and not so well to do consumers. One spending a lot or continuing to spend at a good pace while the poor consumer spends less is contracting. Now you can't just put that down to vast wealth inequality in America because that was true all along. Yes, something has to have changed.

[Pushkin]

Let me tell you something that has changed. So a few days ago we got the consumer sentiment report from the University of Michigan and it said US consumers see a 23% chance of losing their job over the next five years. And that is in the 99th percentile, historically going back to when they started gathering this data in 1997. So people have an unusually high level of insecurity about their job and yet stock markets are just like, wahey, party time. So it's like something is wrong with this picture.

[Katie Martin]

Yeah. And part of the reason that I think the K shaped economy narrative has taken on so much momentum is that we are in an objectively confusing economy where although the unemployment rate is low, which is important to, you know, we're close to the level they call full employment. You know, about as many people are employed as can be employed in a modern economy right now about, but nobody's getting hired and there's not a lot of new job creation and yet GDP is growing very well. So how do you reconcile those two facts? And there's a lot of other in Congress facts like this that need reconciling and the K shaped economy helps pull together these incongruous facts. That being said, I think something is going on here about people's assessment of their prospects. My hypothesis would be that something has happened to change people's attitude about the future because the stuff in the present hasn't changed that much. The unemployment level, the growth of the economy, et cetera, et cetera. So what's going on?

[Pushkin]

So one thing to bear in mind, there is, as you say, like, you know, job openings have been falling pretty fast while the economy seems to have been growing and while markets seem to have been going up and the charts going around sort of showing these two things diverging and saying, oh look, it's okay, it's okay. Gay. The problem is that like some of that weirdness that's going on in the jobs market is like the long tail of COVID you know, when like people like hired like mad, companies hired like mad because it was really hard to hire people. And in the U.S. but you had, you know, less immigration at the time, so it was hard to find people. So there were loads of ads out there. And then, you know, you're sort of seeing that unwind and you do see that, in other words, economies as well. So there's an effort to kind of pin some of this K shaped phenomenon onto Chat GPT and say, look, it looks like AI is eating away at job openings. But I'm not sure a lot of that stacks up actually because what happened with this sort of, you know, upsy downsy sort of phenomenon in the jobs market predates Chat GPT. So to me, I don't know, maybe a lot of it is just people trying to, trying to make sense of why markets are so kind of, you know, fizzy and excited and happy about the world when there are just so many data points that tell you you shouldn't be.

[Katie Martin]

Maybe it's just that I think you're on the right track in the sense that explaining what is happening here on the assumption that what companies are telling us is true about the behavior of lower income consumers generally. And I think, by the way, you don't have to take every single word a company says as gospel about this stuff. Yes, you know that that's that and we can talk about that in a second. But taking what they say is true, you kind of have to do psychology. It can't all be in the numbers. Like you're thinking about how consumers think about the future. So the numbers aren't going to tell you the whole story. But I will tell you some numbers that connect to the story, which is that everything we know about the kind of labor market and wages and so forth tells us that somewhere 22, 20, 23 workers really had the upper hand. They were very much in demand. You could switch jobs and get paid more. So right after the kind of trauma of the pandemic which we all remember, there was this moment where it really looked like the sun was coming out in an extraordinary way for working people. It's not that things are so bad now, but that sense that the kind of deal between labor and management, as it were, had changed has faded and we're kind of back to the old days. And that may be weighing on people's psychology. Like, oh, it looked really good for a second there, but now we're back to the same old stuff and that could be part of it.

[Pushkin]

Thing is, for markets generally, you know, psychology, mycology. So yeah, there are people who are calling BS on this whole K shaped economy thing. They include but are not limited to Dario Perkins from TS Lombard, friend of the show, friend of your newsletter. He said everyone in financial media is talking about wealth effects as a reason for the K shaped economy. Fact check. True.

[Katie Martin]

They are, they are talking about the.

[Pushkin]

More the US stock market rises, the wealthier people feel and the more they spend. At this point this whole thesis is becoming a cliche. But not all cliches are true. His argument, there's no evidence of this and the savings rate among wealthy people is flat. So you know what wealth effects.

[Katie Martin]

Yes. And look, everybody knows that the very rich, when you give them more money, they just invest it like they're consuming as hard as they can. Always. Yeah, you know, I mean they're, you know, as they say, their marginal propensity to consume is very low. That's part of the problem. And I, and several people have made this point too. If the issue was that all the money was going to the wealthy right now, then growth would be worse because when you give very rich people more money, they don't tend to spend it, they don't tend to spend more of it. In other words, they don't, they don't spend more than they were spending already. So I think there has been, you're quite right, there's been exaggerated claims on the consumption side about how much of consumption is now down to rich people. And the idea that that has radically changed that now, like suddenly nobody buys disc detergent anymore, but like for diamonds and cocaine things are going brilliantly. I just, that's not true and I don't think there's any evidence for it. You know what I mean?

[Pushkin]

Can you make cocaine at home? I don't know. Listeners, please don't tell us. So also calling like low key, calling BS on this is Don White from Absolute Strategy Research, another friend of the show. And he's saying that this idea that consumption is so concentrated among the very, very wealthy is just like a little bit off and that there's not much evidence and he doesn't have a good sense that it's like changing particularly over time. So I do kind of wonder where this K shaped thing kind of really got its claws into, into the narrative. I think it's partly around if I remember rightly. Someone asked Jay Powell, chair of the Federal Reserve, the US Central bank, about it not so long ago and, and he didn't sort of bat it away, you know, he, he accepted it as a premise to, to take seriously. So his kind of, you know, acknowledgement or semi acknowledgement that this is a thing has just kind of let it run away with itself and now everything's just like K shaped, K shaped.

[Katie Martin]

I think we need to make a distinction between two Forms of the K shaped economy thesis. One is a claim about the rich and the claim that all the spending that is going on in America, all the consuming, all the economic growth is down to rich people getting richer and spending more of their wealth. I think we have very good reason to believe that this version of the thesis is false. Then there's a second form of the K shaped thesis that poorer consumers are behaving differently now because they have a different view of their prospects than they might have had a year or two ago. And I think we have some reason to believe that that version of it is true. Which brings us back to when Coca Cola, Procter and Gamble, Chipotle, dollar store CEO, whoever one of these people says our lower income consumer is struggling and sort of working paycheck to paycheck. You know how I mean, as one correspondent wrote into me after I wrote about this and said, how do they know who they're rich and their poor customers?

[Pushkin]

That's a good question.

[Katie Martin]

They ask them at the door. But that's a story that a corporation can tell about why they didn't have a great quarter. That is not self incriminating.

[Pushkin]

Yes.

[Katie Martin]

In other words, it's a lot easier story to tell than. Well, actually we've been kind of letting things slip generally around here and we had a bad quarter and we screwed up in various ways. It's more palatable to say, well, it's a harsh world out there and our customers are under pressure. I'm not saying these guys are making this story up. All I'm saying is you can see why an executive might lean into the K shape narrative rather than leaning into our product is not very popular.

[Pushkin]

People are not listening to this podcast because of the K shaped economy. That's what you're saying.

[Katie Martin]

Yeah, exactly. And there are companies that are reporting pretty well.

[Pushkin]

Yeah.

[Katie Martin]

Do you know what I mean? So it's like not every company is complaining about this. Right. So there's other factors playing in as well.

[Pushkin]

I guess where I land on this is like job insecurity and poor confidence among lower income households and families like matters and is something to take seriously. But again, it's not clear to me that this is new. Like America is pretty famous for this. All kind of rich economies are pretty famous for this. So ultimately, who cares? As humans, we care that these people are having a tough time. You know, life's tough on a low income with high prices. But ultimately what difference does that make to markets or to monetary policy? Because again, like people who set interest rates for a living have always been incredibly mindful of income disparities and wealth inequality. So what?

[Katie Martin]

Okay, so for companies, if it is true that people on lower incomes are being more cautious about their consumption because the future doesn't look as bright to them, that's going to matter to certain companies, right? So you have to think about the companies who serve those populations. And you know, that's a kind of stock by stock decision you have to make. The question of what a central banker should do in the face of this is very interesting because their mandate makes them ignore certain pieces of information. Like ultimately what they're supposed to look at is employment and the rate of inflation. Right? And if the rate of inflation is above target like it is now, and the rate of unemployment is still reasonably low, then if they were to say, look, poor people are suffering, we have to change our policy package here, they would be sort of exceeding their mandate.

[Pushkin]

And if there's one thing MAGA don't like, it's the Fed exceeding its mandate. Like in a sense, no matter how hard the Fed tries not to be political, right? Just stay out of politics. Our job is monetary policy. We set interest rates like you kind of can't help it. Like the outcomes of what monetary policy does have political implications. So it's always political whether it wants to be or not. I mean, who would be a central banker? Not me.

[Katie Martin]

I don't understand politics very well and I try not to go too far from markets land into politics land. But I will say that the stuff we've been talking about on this show, of course, is an incredibly live political issue that both sides of the American political spectrum care about tremendously. So remember, you can look at Trump's policy set as an effort to speak to and help the people in that lower half of the wealth spectrum. Tariffs in theory are supposed to help those people get. In theory and we can have a whole discussion, are supposed to help those people get paid more. That's supposed to bring high paying jobs back to America to help those people. Affordability is an issue for them. Right. That he's very. I mean, you have Trump talking about sending out checks again this week.

[Pushkin]

Right?

[Katie Martin]

And at the same time, the Democrats who won several local and national elections last week, they're talking about affordability too. So the stuff we're talking to today, whether or not it's relevant to markets and how, you can be damn sure it's relevant to every politician. And so the fiscal policies will respond to this stuff even if monetary policy does not.

[Pushkin]

Listeners, I don't know if you agree, but what I'm getting here is Rob Armstrong's going to run for President. Ladies and gentlemen, you heard it here first. Yes, he's running.

[Katie Martin]

Every household in America will be able to afford store bought dishwasher tablets under the Armstrong administration. No more making your own dishwasher tablets.

[Pushkin]

What a beautiful policy platform that is. Listeners, we'll be back in just a couple of minutes for Rob to flesh out more of his policy platform with long shorts.

[PGM Announcer]

At pgum, Expertise across public and private markets today helps build resilient portfolios tomorrow. With over $1.4 trillion in AUM, PGUM has navigated over 30 market cycles with active investing and disciplined risk management. But it's not just about the numbers. Our combined global expertise and local insights give us these strategic perspectives we need to help you reach your long term goals. Pgum Our investments shape tomorrow today Okey doke.

[Pushkin]

It is time for Long Short that part of the show where we go long a thing we love or short a thing we hate. Rob, what you got?

[Katie Martin]

I am Long Passive investing.

[Pushkin]

Are you?

[Katie Martin]

And this is a very standard thing to be long among finance nerds like myself, but I'm going to reiterate it because of this great story by our colleague Costas Marcellus. Elliott Management, which is a big hedge fund, had to explain in their letter recently why their performance, their returns since 1994 have now fallen behind the returns of the S&P 500. And it's a story as old as time that a big fancy hedge fund over time turns out not to outperform the index. But what is striking about this particular story is that Elliot Management is really good at this stuff. They are a very well run fund, activist investment fund and even they over a multi year period struggle to keep up with the old big cap US Index. So once again, yay for just owning that tracker fund.

[Pushkin]

My only counterpoint to that would be that like a tracker fund that tracks the US market is effectively an active fund that is leaning into big tech stocks. So there's kind of no difference.

[Katie Martin]

They're just okay, fine, fine, fine. Anyway, rain on my parade. What do you have? Katie?

[Pushkin]

I will. You can take your vengeance when you're president. Although I could be like your chief of staff or something. Anyway, yeah, I am short the story by our colleague Laith Al Khalaf, who wrote Lloyds Banking Groups, like a retail banking group in the uk, analyzed data from the personal bank accounts of more than 30,000 employees to assess their financial resilience as part of pay negotiations. And I'm like, am I the only person who thinks that's a bit icky?

[Katie Martin]

Like, that just sounds like an unfair way to negotiate with your employees to me. Like, you don't tell me what my salary is going to be on the basis of how rich you think I am. You pay me because I'm doing work that's worth something to you.

[Pushkin]

I mean, right? I just find it odd that, like, it's okay to aggregate and look at employees data in that, in that way.

[Katie Martin]

Yeah. That story just makes me angry. I'm with you. In shorting.

[Pushkin]

Yeah. I can't quite articulate why I don't like it, but I don't like it. I find it weird. On that note, we will wrap up there. Listeners, if you have adventures with dishwasher tablets or indeed with anything else we've mentioned in the show today, please get in touch unhedgedft.com we will be right back in your actual ears on Tuesday. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. Topher forges is the FT's acting co head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening.

[Katie Martin]

Sam.