K-Shaped Economy Returns: Widening Wealth Gap in 2026

The American economy is tipping away from low-wage workers once again, marking a return to a K-shaped economy. This economic structure is defined by widening gaps between high and low-income Americans, where higher earners see steadier opportunities while lower-income households face cooler prospects.

Some economists are warning that this uneven growth could threaten economic stability in 2026. The post-pandemic era, previously marked by growing wages and opportunities for lower-income Americans, has flipped around. For those at the bottom, in lower-earning positions that are traditionally more sensitive to downturns, things are looking worse.

The return to this economic disparity has caught the attention of the Federal Reserve. In minutes from the December Fed meeting, a majority of participants mentioned evidence of stronger spending growth for higher-income households, while lower-earning households were becoming increasingly price sensitive.

The K-shaped economy has been slowly shaping up over the last couple of years, but it has accelerated in the last few months. A report from the cursor-pointer">Bank of America Institute showed that the growth in credit and debit card spending among lower-income and higher-income households split into a K shape around this past spring.

Specifically, higher-income households experienced spending growth near 3% year-over-year in late 2025. In contrast, lower-income households saw spending growth of less than 1% during the same period.

While the 'K shape' continues, the authors of the report wrote that it will likely gather additional focus in 2026. This spending divergence is a primary indicator of the unequal economic recovery.

At a December press conference, Federal Reserve Chair Jerome Powell addressed the sustainability of this trend. Powell noted that most consumption happens by people who have more means, stating:

"Most of the consumption does happen by people who have more means. I think the top third accounts for way more than a third of the consumption, for example. So, it's a good question how sustainable that is."

On the income side, those at the bottom are doing worse than those at the top. The Atlanta Fed wage growth tracker showed that growth for the highest quartile of the wage distribution surpassed that of the lowest quartile in October 2024 and has remained consistently higher since then.

Wage growth for the lowest quartile skyrocketed back in 2022, reaching the highest point on record in the fall. However, the gap between the two quartiles widened to the highest point in July, and the upper quartile has maintained its lead.

Stephen Kates, a financial analyst at Bankrate, highlighted the burden on lower earners:

"People who are putting a lot more of their income toward essential expenses are feeling burdened by that at a much greater capacity than people who have much higher incomes at the same time, unlike during that post-pandemic environment."

While wages are trending higher for the upper quartile, it doesn't necessarily mean blockbuster gains, especially as inflation remains stubborn. Gregory Daco, chief economist at EY, said cooler income growth has pushed many upper-median and below households to lean on savings and credit.

Economists are questioning the long-term viability of a consumer base supported primarily by the wealthy. Gregory Daco stated, "A K-shaped consumer spending outlook is simply not sustainable in the long-run — eventually income pulls spending."

Some analysts, such as Joe Brusuelas, chief economist of RSM, argue that the K-shaped economy never really left. Brusuelas noted that the U.S. has been in a K-shaped economy for the better part of two decades, pointing to the 2008 financial crisis as a factor.

Anna Paulson, president and CEO of the Federal Reserve Bank of Philadelphia, emphasized the role of the stock market in supporting high-end consumption. Data from the Federal Reserve's Distributional Financial Accounts showed that the wealthiest 1% of Americans hold nearly half of the country's corporate equities and mutual funds.

Paulson commented on this concentration:

"So, while headline growth is shaping up to be pretty decent this year, the base of support looks different — with a lot of concentration at the top."

In Brusuelas's view, the U.S. economy is largely locked into that K-shape and would need serious policy changes to shift it. He does not see that as likely happening in 2026, noting that the policy landscape is "all tilted toward the upper spur of the K."

What is a K-shaped economy?
A K-shaped economy occurs when different segments of the population experience vastly different economic outcomes. In this scenario, high-income earners continue to see growth and stability, while low-income earners face economic decline or stagnation.

Why is the economy shifting back to this model?
The shift is driven by diverging wage growth and spending habits. Higher-income households are benefiting from a robust stock market and steady wage increases, while lower-income households are becoming more price-sensitive due to inflation and essential costs.

What are the risks for 2026?
Economists warn that an economy largely propped up by the spending of the wealthy may be unstable. If lower-income households pull back further on spending due to financial strain, it could dampen overall economic growth.