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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: If you squint at enough data about the US economy

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Speaker 2: right now, on income and spending and consumer confidence, there's

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Speaker 2: a shape that starts to emerge, a letter, the letter K.

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Speaker 3: A K shaped economy is the result of a bifurcation

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Speaker 3: and consumer confidence.

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Speaker 2: Economist Peter Atwater is responsible for popularizing the idea of

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Speaker 2: a K shaped economy in twenty twenty during the global

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Speaker 2: COVID pandemic.

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Speaker 3: We should have hoped for a V shaped recovery coming

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Speaker 3: out of COVID, where all ships rose together, even a

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Speaker 3: U shaped recovery where there's a delay in the recovery

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Speaker 3: but ultimately it all rises together.

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Speaker 2: But we didn't get a V. We didn't get a U.

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Speaker 2: We didn't even get an L where things stayed bad

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Speaker 2: for everyone. Instead we got a K.

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Speaker 1: So, if you think about the letter K, it has

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Speaker 1: a vertical line, obviously, and then two lines kind of

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Speaker 1: diverging from the center of that vertical line.

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Speaker 2: That's Bloomberg reporter Katerina Sariva, and the divergence she and

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Speaker 2: Peter are talking about is a split in the paths

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Speaker 2: of Americans at the top and bottom of the US

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Speaker 2: economy with the fortunes of those at the top rising

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Speaker 2: and those at the bottom getting worse. That's how the

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Speaker 2: economy looked during the recovery from COVID, and it's how

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Speaker 2: it looks again now.

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Speaker 1: Today, fast forward to twenty twenty five. We're again talking

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Speaker 1: about the K shape because we are seeing kind of

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Speaker 1: a return to that. We're seeing consumer spending really slow

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Speaker 1: down for folks at the lower ends of the income spectrum,

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Speaker 1: while rich folks are doing really well.

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Speaker 2: And this time around, the two sides of that K

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Speaker 2: are getting even farther apart. I'm Sarah Holder, and this

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Speaker 2: is the big take from Bloomberg News today on the

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Speaker 2: show A Tale of Two Economies. Why the gap between

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Speaker 2: America's wealthiest and everyone else is widening, how it's showing

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Speaker 2: up in company earnings reports, and what the K shape

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Speaker 2: means for the country's overall financial health. Economist Peter Atwater

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Speaker 2: studies confidence and how it impacts consumers decision making. That's

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Speaker 2: what originally drove him to recognize this K shaped pattern.

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Speaker 3: Early on in COVID, I saw as white collar workers

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Speaker 3: their confidence immediately popped when they could work from home.

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Speaker 3: On the other hand, blue collar workers factory workers, hospital workers.

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Speaker 3: Their confidence kept deteriorating. So based on that divergence and confidence,

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Speaker 3: I expected that the economy would follow.

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Speaker 2: And Bloomberg's Katarina Sariva says it did follow.

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Speaker 1: You had one group of people that were kind of

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Speaker 1: in the upper echelons of the economy, so think like

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Speaker 1: high income earners, people with a lot of wealth, and

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Speaker 1: those people were really doing well. The stock market was

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Speaker 1: rising a lot already by the end of twenty twenty,

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Speaker 1: So people with wealth and people with jobs where they

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Speaker 1: could work from home, for example, we're doing really well. Now.

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Speaker 1: The other half of the economy really wasn't. We still

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Speaker 1: had like eleven million people unemployed at the end of

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Speaker 1: twenty twenty. Unemployment rate was above six percent, So for

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Speaker 1: anyone who didn't have stocks, for example, maybe didn't own

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Speaker 1: a home, things were not going great.

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Speaker 2: Eventually, the government rolled out stimulus programs, lockdowns lifted, and

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Speaker 2: companies started rehiring workers again.

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Speaker 1: And that is especially benefited the lower income folks because

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Speaker 1: those were the people that had the most impact from

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Speaker 1: the pandemic layoffs. So when you had companies trying to

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Speaker 1: hire them again. For a lot of these service industry jobs,

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Speaker 1: that had to shutter in the pandemic, you saw big

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Speaker 1: wage gains. That has changed now, and in fact, it

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Speaker 1: has refersed The largest wage increases right now are for

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Speaker 1: the highest income earners.

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Speaker 2: Those high earners are also the people who tend to

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Speaker 2: be making the most from the stock market.

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Speaker 1: It's been just surging this year, so that obviously gives

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Speaker 1: people confidence. There's research showing that each additional dollar of

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Speaker 1: stock market wealth raises consumption by about five to fifteen cents.

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Speaker 1: And then not just the stock market, you know, you

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Speaker 1: also have to look at wealth that's been created through

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Speaker 1: home ownership, again, something that disproportionately impacts wealthier people, and

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Speaker 1: home prices have just increased so much over the past

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Speaker 1: five years. That also helps me people feel like they

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Speaker 1: can spend more.

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Speaker 2: Would you say that there's a capital K shaped economy

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Speaker 2: and then there's other lowercase shaped economy sort of playing

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Speaker 2: out in other sectors like the housing market.

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Speaker 3: Yeah.

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Speaker 1: Absolutely, We're really in a moment where it's becoming a

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Speaker 1: really popular metaphor, I think, and it's being used across

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Speaker 1: a variety of industries. So yeah, you can look at

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Speaker 1: home buying where things are going really well for that

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Speaker 1: upper part of the market because again, folks are able

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Speaker 1: to sell their homes and are able to have more

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Speaker 1: wealth through the stock market, so they can go buy

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Speaker 1: a bigger home and not as much at the lower edges.

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Speaker 1: I've heard it talked about. For example, if you're looking

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Speaker 1: at how airlines are performing right now, so you look

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Speaker 1: at the legacy carriers like the big American airlines Delta,

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Speaker 1: they're doing really well, and they're reporting that high end

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Speaker 1: consumers business travelers for example, are spending people are flying internationally,

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Speaker 1: even if maybe not as much domestically, right, so they're

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Speaker 1: still seeing a lot of revenue from that. And then

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Speaker 1: some of the smaller like the low cost carriers in

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Speaker 1: some cases like Spirit filing for bankruptcy, really not doing well.

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Speaker 1: So it's an interesting dynamic that I think is playing

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Speaker 1: out in a lot of different areas.

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Speaker 2: You can see a similar trend in the food and

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Speaker 2: hospitality industries too.

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Speaker 1: So you have some of these fast casual places that

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Speaker 1: are a bit more expensive, right, like not the cheapest

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Speaker 1: option out there, really not doing well. And then restaurant

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Speaker 1: chains like McDonald's reporting that they're doing okay because they're

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Speaker 1: getting a lot of these consumers that would be going

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Speaker 1: to somewhere like Chipotle or Sweet Green for example, now

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Speaker 1: kind of trading down to something like a McDonald's. You're

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Speaker 1: also definitely hearing corporations talk about how their luxury consumers

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Speaker 1: are really supporting their growth. Hearing this from the hotel chains,

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Speaker 1: also hearing this from Ethan Allen, the furniture company any

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Speaker 1: that one the higher higher end, they're still seeing a

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Speaker 1: robust consumption there, and then that's supporting kind of the

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Speaker 1: rest of their business.

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Speaker 3: Businesses have found a way to cater to this divergence.

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Speaker 2: Economist Peter Atwater again.

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Speaker 3: Meanwhile, for those at the bottom, it's becoming a monthly,

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Speaker 3: if not now weekly exercise and juggling their finances.

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Speaker 2: The Atlanta Fed has reported that some shoppers are shifting

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Speaker 2: to liquid or powder laundry detergent instead of using pre

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Speaker 2: portion pots so they can ration it out in smaller amounts.

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Speaker 2: The grocery chain Kroger has found that lower and middle

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Speaker 2: income shoppers are using more coupons and buying cheaper brands.

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Speaker 2: People are trying to find ways to spend less. But

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Speaker 2: the thing about a K shaped economy is that even

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Speaker 2: as the top and bottom are getting further apart, looking

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Speaker 2: at the big picture can be misleading because when it

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Speaker 2: comes to overall spending or overall growth, the economy looks

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Speaker 2: like it's doing okay.

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Speaker 1: We had stronger economic growth this year than most people

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Speaker 1: thought we would. We have a pretty low unemployment rate

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Speaker 1: still right like four point three percent. Things still look

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Speaker 1: really good. It's just when you look under the hood,

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Speaker 1: you realize that it's really being driven by a small

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Speaker 1: number of people. This is important because the US economy,

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Speaker 1: we're a consumer economy. Two thirds of economic activity in

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Speaker 1: the US is driven by the consumer. So when you

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Speaker 1: start to concentrate that in an increasingly smaller number of people,

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Speaker 1: it just means you have a more fragile system.

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Speaker 2: In the early nineties, the top ten percent of earners

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Speaker 2: accounted for about thirty five percent of the country's consumer spending.

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Speaker 2: Today they account for nearly fifty percent. And as the

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Speaker 2: economy gets more top heavy, it also becomes more fragile.

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Speaker 2: What are the consequences that's after the break. We've talked

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Speaker 2: a lot about how the current economy is bifurcating, splitting

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Speaker 2: with the wealthy and everyone else on separate tracks, moving

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Speaker 2: away from each other. The letter K but economist Peter

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Speaker 2: Atwater has another image to consider, a Jenga tower.

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Speaker 3: I feel like the blocks in the Jenga tower, particularly

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Speaker 3: at the very foundation, are being pulled away at the top.

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Speaker 3: So much is happening financially, and that would be okay

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Speaker 3: if there was some level of robustness at the bottom,

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Speaker 3: that if the K really represented strength at the top

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Speaker 3: and the bottom. But what we have now is all

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Speaker 3: of this oversized activity at the very top. Meanwhile, bel

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Speaker 3: it is becoming more and more fragile.

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Speaker 2: In October, FED chair Jerome Powell said that this bifurcated

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Speaker 2: economy is something he's watching very very carefully, and Peter's

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Speaker 2: watching closely too. He believes that if something causes the

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Speaker 2: wealthiest consumers to pull back on spending, say a big

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Speaker 2: decline in the stock market, it could send the jungle

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Speaker 2: blocks toppling.

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Speaker 3: We think of these markets as being representative of strength,

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Speaker 3: and as a researcher, what I know is that invincible

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Speaker 3: markets are incredibly fragile, and as confidence falls, scrutiny will intensify.

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Speaker 2: One area that Peter thinks is especially vulnerable to scrutiny

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Speaker 2: right now, AI I think.

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Speaker 3: What it would take to topple is a relatively small event.

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Speaker 3: The challenge is the confidence in AI. Individuals will challenge

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Speaker 3: the benefits of all of this AI abstraction and demand immediate,

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Speaker 3: tangible results that it does not appear that it can

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Speaker 3: yet deliver.

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Speaker 2: So what would it take to bolster the Jenga Towers

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Speaker 2: foundations and to start narrowing the diverging parts of the

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Speaker 2: K It's no easy task. The government shutdown has put

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Speaker 2: new immediate strains on lower income Americans, withn benefits on Holt,

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Speaker 2: and longer term fixes haven't found much political momentum, at

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Speaker 2: least at the federal.

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Speaker 1: Level, things like reforming the tax code, looking at things

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Speaker 1: like the capital gains tax, which really is very low

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Speaker 1: in this country, right, looking at things like the payroll tax,

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Speaker 1: estate tax, corporate tax rates. Right, there's a lot of

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Speaker 1: ways that you could change tax lat to make it

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Speaker 1: more progressive. I think economists would argue, I don't know

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Speaker 1: right now how widespread of support there is for doing

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Speaker 1: things like that at the federal level. Right. We just

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Speaker 1: had a massive tax reform package go through that in

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Speaker 1: some ways was kind of the opposite of what we're

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Speaker 1: talking about, that was perhaps more helpful to higher income

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Speaker 1: and corporations.

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Speaker 2: Is a K shaped economy just a euphemism for an

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Speaker 2: unequal economy? Is the KY just measuring inequality? Yeah?

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Speaker 1: Absolutely. We talked to some economists who noted that inequality

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Speaker 1: it's not new for the US economy, right We've had

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Speaker 1: widening inequality for decades here. But widening inequality when it

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Speaker 1: gets to levels like what we're seeing right now, tends

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Speaker 1: to not be good for an economy because what it

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Speaker 1: can mean is that you can actually have slower growth,

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Speaker 1: and it can even lead to things like social unrest.

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Speaker 3: It's not just inequality in terms of an economic sense.

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Speaker 3: This is inequality in multiple dimensions at once. Because for

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Speaker 3: those at the bottom, they have scarcity in education, in healthcare,

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Speaker 3: in childcare, in job opportunity. They have what I call

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Speaker 3: stacked vulnerability, where the economic piece is just one more thing.

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Speaker 3: And at the same time, those at the top have

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Speaker 3: over abundance in everything, power, money, influence, and so it's

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Speaker 3: become very difficult for those at the bottom to ignore

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Speaker 3: what's happening around them.

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Speaker 2: This is the Big Take from Bloomberg News. I'm Sarah Holder.

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