Economists Debate US Economy Shape

Economists, corporate leaders, and politicians are using letters like K, C, and E to define the current U.S. economic moment. The debate centers on whether the post-pandemic K-shaped recovery, marked by unequal expansion for different income groups, still persists or has evolved.

This labeling race involves more than semantics, influencing politicians, monetary policymakers, and consumer company executives. According to Don Rissmiller, chief economist at research firm Baird Strategas, it is unusual for such descriptions to have staying power among everyday Americans several years after a recession, with mounting concerns around wealth inequality possibly driving heightened awareness.

From K to C

Treasury Secretary Scott Bessent declared this month that the K-shaped economy is over, replaced by a C-shaped economy where lower-income consumers are gaining ground. Bessent, one of former President Donald Trump's top economic lieutenants, cited wage gains among lower-earners and larger tax cuts this year, pointing to Trump's "no tax on tips" and "no tax on overtime" policies.

Hilton Worldwide CEO Christopher Nassetta told analysts late last month that his company is "definitely seeing" a C-shaped economy. Nassetta said Hilton's middle- and upper-middle segments have swung from posting negative numbers to growing at rates as high as 6%, indicating the middle class is getting back in the game.

However, Anthony Chan, JPMorgan's former chief economist, argued that the U.S. war with Iran complicates this view. He stated that lower-income consumers spend more of their incomes on energy, meaning surging gas prices could mitigate gains from White House tax and affordability efforts.

Still a K

Anthony Chan also noted it is hard to argue the K-shaped economy has faded while consumer sentiment remains weak and the cost of living is a defining election issue. The University of Michigan's survey showed consumer sentiment dropped 11% in August from a year ago, with confidence among low- and middle-income respondents taking an outsized hit.

Leaders at several consumer companies said they still see signs of a K economy. Shane Grant, Colgate-Palmolive's operations chief for the Americas, said in June that the dynamic is "alive and well." Lowe's executive Bill Boltz and Constellation Brands CEO Nicholas Fink similarly cited the K shape as influencing consumer trends.

Research presents a mixed picture. A Federal Reserve Bank of Richmond report noted consumption reflected a clear K-shaped break between 2021 and 2023, even if income growth did not. The Bank of America Institute said the spending gap across income classes began narrowing in May, suggesting convergence. Conversely, New York Fed researchers pointed to near-record credit card balances of $1.26 trillion in the second quarter as evidence the K-shaped theme dominates, with many households living paycheck to paycheck.

Evolution to E

Some analysts wonder if the economy has evolved into an E-shape, with three distinct classes neither moving farther apart nor converging. Don Rissmiller of Baird Strategas described it as each group finding a way to live, an outcome that looks more stable than not.

Michael Eisenband, global chairman of corporate finance at FTI Consulting, said the E-shaped assessment better illustrates divergent spending patterns and is a more fitting depiction of the times. Heather Long, chief economist at Navy Federal Credit Union, suggested an E shape may be more accurate than a K because it better captures a middle class that's just hanging on, adding that a view of convergence requires "some real mental gymnastics."

Wyndham Hotels & Resorts CEO Geoff Ballotti told analysts that while its middle-tier consumer is feeling better, that might reflect either a C- or E-shaped economy. For other executives, like Somnigroup International CEO Scott Thompson, the E-shaped concept remains alien, admitting it was a new one for him on a recent earnings call.