Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: If you squint at enough data about the US economy
Speaker 2: right now, on income and spending and consumer confidence, there's
Speaker 2: a shape that starts to emerge, a letter, the letter K.
Speaker 3: A K shaped economy is the result of a bifurcation
Speaker 3: and consumer confidence.
Speaker 2: Economist Peter Atwater is responsible for popularizing the idea of
Speaker 2: a K shaped economy in twenty twenty during the global
Speaker 2: COVID pandemic.
Speaker 3: We should have hoped for a V shaped recovery coming
Speaker 3: out of COVID, where all ships rose together, even a
Speaker 3: U shaped recovery where there's a delay in the recovery
Speaker 3: but ultimately it all rises together.
Speaker 2: But we didn't get a V. We didn't get a U.
Speaker 2: We didn't even get an L where things stayed bad
Speaker 2: for everyone. Instead we got a K.
Speaker 1: So, if you think about the letter K, it has
Speaker 1: a vertical line, obviously, and then two lines kind of
Speaker 1: diverging from the center of that vertical line.
Speaker 2: That's Bloomberg reporter Katerina Sariva, and the divergence she and
Speaker 2: Peter are talking about is a split in the paths
Speaker 2: of Americans at the top and bottom of the US
Speaker 2: economy with the fortunes of those at the top rising
Speaker 2: and those at the bottom getting worse. That's how the
Speaker 2: economy looked during the recovery from COVID, and it's how
Speaker 2: it looks again now.
Speaker 1: Today, fast forward to twenty twenty five. We're again talking
Speaker 1: about the K shape because we are seeing kind of
Speaker 1: a return to that. We're seeing consumer spending really slow
Speaker 1: down for folks at the lower ends of the income spectrum,
Speaker 1: while rich folks are doing really well.
Speaker 2: And this time around, the two sides of that K
Speaker 2: are getting even farther apart. I'm Sarah Holder, and this
Speaker 2: is the big take from Bloomberg News today on the
Speaker 2: show A Tale of Two Economies. Why the gap between
Speaker 2: America's wealthiest and everyone else is widening, how it's showing
Speaker 2: up in company earnings reports, and what the K shape
Speaker 2: means for the country's overall financial health. Economist Peter Atwater
Speaker 2: studies confidence and how it impacts consumers decision making. That's
Speaker 2: what originally drove him to recognize this K shaped pattern.
Speaker 3: Early on in COVID, I saw as white collar workers
Speaker 3: their confidence immediately popped when they could work from home.
Speaker 3: On the other hand, blue collar workers factory workers, hospital workers.
Speaker 3: Their confidence kept deteriorating. So based on that divergence and confidence,
Speaker 3: I expected that the economy would follow.
Speaker 2: And Bloomberg's Katarina Sariva says it did follow.
Speaker 1: You had one group of people that were kind of
Speaker 1: in the upper echelons of the economy, so think like
Speaker 1: high income earners, people with a lot of wealth, and
Speaker 1: those people were really doing well. The stock market was
Speaker 1: rising a lot already by the end of twenty twenty,
Speaker 1: So people with wealth and people with jobs where they
Speaker 1: could work from home, for example, we're doing really well. Now.
Speaker 1: The other half of the economy really wasn't. We still
Speaker 1: had like eleven million people unemployed at the end of
Speaker 1: twenty twenty. Unemployment rate was above six percent, So for
Speaker 1: anyone who didn't have stocks, for example, maybe didn't own
Speaker 1: a home, things were not going great.
Speaker 2: Eventually, the government rolled out stimulus programs, lockdowns lifted, and
Speaker 2: companies started rehiring workers again.
Speaker 1: And that is especially benefited the lower income folks because
Speaker 1: those were the people that had the most impact from
Speaker 1: the pandemic layoffs. So when you had companies trying to
Speaker 1: hire them again. For a lot of these service industry jobs,
Speaker 1: that had to shutter in the pandemic, you saw big
Speaker 1: wage gains. That has changed now, and in fact, it
Speaker 1: has refersed The largest wage increases right now are for
Speaker 1: the highest income earners.
Speaker 2: Those high earners are also the people who tend to
Speaker 2: be making the most from the stock market.
Speaker 1: It's been just surging this year, so that obviously gives
Speaker 1: people confidence. There's research showing that each additional dollar of
Speaker 1: stock market wealth raises consumption by about five to fifteen cents.
Speaker 1: And then not just the stock market, you know, you
Speaker 1: also have to look at wealth that's been created through
Speaker 1: home ownership, again, something that disproportionately impacts wealthier people, and
Speaker 1: home prices have just increased so much over the past
Speaker 1: five years. That also helps me people feel like they
Speaker 1: can spend more.
Speaker 2: Would you say that there's a capital K shaped economy
Speaker 2: and then there's other lowercase shaped economy sort of playing
Speaker 2: out in other sectors like the housing market.
Speaker 3: Yeah.
Speaker 1: Absolutely, We're really in a moment where it's becoming a
Speaker 1: really popular metaphor, I think, and it's being used across
Speaker 1: a variety of industries. So yeah, you can look at
Speaker 1: home buying where things are going really well for that
Speaker 1: upper part of the market because again, folks are able
Speaker 1: to sell their homes and are able to have more
Speaker 1: wealth through the stock market, so they can go buy
Speaker 1: a bigger home and not as much at the lower edges.
Speaker 1: I've heard it talked about. For example, if you're looking
Speaker 1: at how airlines are performing right now, so you look
Speaker 1: at the legacy carriers like the big American airlines Delta,
Speaker 1: they're doing really well, and they're reporting that high end
Speaker 1: consumers business travelers for example, are spending people are flying internationally,
Speaker 1: even if maybe not as much domestically, right, so they're
Speaker 1: still seeing a lot of revenue from that. And then
Speaker 1: some of the smaller like the low cost carriers in
Speaker 1: some cases like Spirit filing for bankruptcy, really not doing well.
Speaker 1: So it's an interesting dynamic that I think is playing
Speaker 1: out in a lot of different areas.
Speaker 2: You can see a similar trend in the food and
Speaker 2: hospitality industries too.
Speaker 1: So you have some of these fast casual places that
Speaker 1: are a bit more expensive, right, like not the cheapest
Speaker 1: option out there, really not doing well. And then restaurant
Speaker 1: chains like McDonald's reporting that they're doing okay because they're
Speaker 1: getting a lot of these consumers that would be going
Speaker 1: to somewhere like Chipotle or Sweet Green for example, now
Speaker 1: kind of trading down to something like a McDonald's. You're
Speaker 1: also definitely hearing corporations talk about how their luxury consumers
Speaker 1: are really supporting their growth. Hearing this from the hotel chains,
Speaker 1: also hearing this from Ethan Allen, the furniture company any
Speaker 1: that one the higher higher end, they're still seeing a
Speaker 1: robust consumption there, and then that's supporting kind of the
Speaker 1: rest of their business.
Speaker 3: Businesses have found a way to cater to this divergence.
Speaker 2: Economist Peter Atwater again.
Speaker 3: Meanwhile, for those at the bottom, it's becoming a monthly,
Speaker 3: if not now weekly exercise and juggling their finances.
Speaker 2: The Atlanta Fed has reported that some shoppers are shifting
Speaker 2: to liquid or powder laundry detergent instead of using pre
Speaker 2: portion pots so they can ration it out in smaller amounts.
Speaker 2: The grocery chain Kroger has found that lower and middle
Speaker 2: income shoppers are using more coupons and buying cheaper brands.
Speaker 2: People are trying to find ways to spend less. But
Speaker 2: the thing about a K shaped economy is that even
Speaker 2: as the top and bottom are getting further apart, looking
Speaker 2: at the big picture can be misleading because when it
Speaker 2: comes to overall spending or overall growth, the economy looks
Speaker 2: like it's doing okay.
Speaker 1: We had stronger economic growth this year than most people
Speaker 1: thought we would. We have a pretty low unemployment rate
Speaker 1: still right like four point three percent. Things still look
Speaker 1: really good. It's just when you look under the hood,
Speaker 1: you realize that it's really being driven by a small
Speaker 1: number of people. This is important because the US economy,
Speaker 1: we're a consumer economy. Two thirds of economic activity in
Speaker 1: the US is driven by the consumer. So when you
Speaker 1: start to concentrate that in an increasingly smaller number of people,
Speaker 1: it just means you have a more fragile system.
Speaker 2: In the early nineties, the top ten percent of earners
Speaker 2: accounted for about thirty five percent of the country's consumer spending.
Speaker 2: Today they account for nearly fifty percent. And as the
Speaker 2: economy gets more top heavy, it also becomes more fragile.
Speaker 2: What are the consequences that's after the break. We've talked
Speaker 2: a lot about how the current economy is bifurcating, splitting
Speaker 2: with the wealthy and everyone else on separate tracks, moving
Speaker 2: away from each other. The letter K but economist Peter
Speaker 2: Atwater has another image to consider, a Jenga tower.
Speaker 3: I feel like the blocks in the Jenga tower, particularly
Speaker 3: at the very foundation, are being pulled away at the top.
Speaker 3: So much is happening financially, and that would be okay
Speaker 3: if there was some level of robustness at the bottom,
Speaker 3: that if the K really represented strength at the top
Speaker 3: and the bottom. But what we have now is all
Speaker 3: of this oversized activity at the very top. Meanwhile, bel
Speaker 3: it is becoming more and more fragile.
Speaker 2: In October, FED chair Jerome Powell said that this bifurcated
Speaker 2: economy is something he's watching very very carefully, and Peter's
Speaker 2: watching closely too. He believes that if something causes the
Speaker 2: wealthiest consumers to pull back on spending, say a big
Speaker 2: decline in the stock market, it could send the jungle
Speaker 2: blocks toppling.
Speaker 3: We think of these markets as being representative of strength,
Speaker 3: and as a researcher, what I know is that invincible
Speaker 3: markets are incredibly fragile, and as confidence falls, scrutiny will intensify.
Speaker 2: One area that Peter thinks is especially vulnerable to scrutiny
Speaker 2: right now, AI I think.
Speaker 3: What it would take to topple is a relatively small event.
Speaker 3: The challenge is the confidence in AI. Individuals will challenge
Speaker 3: the benefits of all of this AI abstraction and demand immediate,
Speaker 3: tangible results that it does not appear that it can
Speaker 3: yet deliver.
Speaker 2: So what would it take to bolster the Jenga Towers
Speaker 2: foundations and to start narrowing the diverging parts of the
Speaker 2: K It's no easy task. The government shutdown has put
Speaker 2: new immediate strains on lower income Americans, withn benefits on Holt,
Speaker 2: and longer term fixes haven't found much political momentum, at
Speaker 2: least at the federal.
Speaker 1: Level, things like reforming the tax code, looking at things
Speaker 1: like the capital gains tax, which really is very low
Speaker 1: in this country, right, looking at things like the payroll tax,
Speaker 1: estate tax, corporate tax rates. Right, there's a lot of
Speaker 1: ways that you could change tax lat to make it
Speaker 1: more progressive. I think economists would argue, I don't know
Speaker 1: right now how widespread of support there is for doing
Speaker 1: things like that at the federal level. Right. We just
Speaker 1: had a massive tax reform package go through that in
Speaker 1: some ways was kind of the opposite of what we're
Speaker 1: talking about, that was perhaps more helpful to higher income
Speaker 1: and corporations.
Speaker 2: Is a K shaped economy just a euphemism for an
Speaker 2: unequal economy? Is the KY just measuring inequality? Yeah?
Speaker 1: Absolutely. We talked to some economists who noted that inequality
Speaker 1: it's not new for the US economy, right We've had
Speaker 1: widening inequality for decades here. But widening inequality when it
Speaker 1: gets to levels like what we're seeing right now, tends
Speaker 1: to not be good for an economy because what it
Speaker 1: can mean is that you can actually have slower growth,
Speaker 1: and it can even lead to things like social unrest.
Speaker 3: It's not just inequality in terms of an economic sense.
Speaker 3: This is inequality in multiple dimensions at once. Because for
Speaker 3: those at the bottom, they have scarcity in education, in healthcare,
Speaker 3: in childcare, in job opportunity. They have what I call
Speaker 3: stacked vulnerability, where the economic piece is just one more thing.
Speaker 3: And at the same time, those at the top have
Speaker 3: over abundance in everything, power, money, influence, and so it's
Speaker 3: become very difficult for those at the bottom to ignore
Speaker 3: what's happening around them.
Speaker 2: This is the Big Take from Bloomberg News. I'm Sarah Holder.
Speaker 2: To get more from the Big Take and unlimited access
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Speaker 2: Thanks for listening. We'll be back tomorrow