With the “K-shaped economy” becoming a buzzword in recent years, Mark Mathews, the National Retail Federation’s chief economist, recently explored what it means for the retail business.
He wrote in a blog entry, “A K-shaped economy describes a scenario where different income groups grow at drastically different rates, with their relative performance diverging like the arms of the letter ‘K.’”
Examining credit and debit card data with the help of Pyxis by Bain & Company and Affinity Solutions, NRF identified a major difference in spending growth in discretionary goods when broken out by consumer spending levels.
One broader finding was that although seven of the 10 income groups declined, overall discretionary spending in 2025 still managed growth, up 1.2%, as the top 20% of spenders in the discretionary category is estimated to account for over 60% of total spending. Mathews wrote, “Essentially, strong spending in higher income segments is masking weakness among lower income segments.”
Exploring some retail channels, NRF’s analysis found spending on department stores was up 1.4% — although only one income bracket, the top 10%, increased their spending at the channel. With their appeal to price-conscious consumers, wholesale clubs were able to grow sales across all income segments, expanding 13.6% in total.
Mathews concluded: “What is clear is that across lower- to middle-income households, growth in spending has begun to slow. However, top-line spending remains robust, and some sectors have even managed to retain or grow their share across income groups. “
Walmart, Costco, Off-Pricers Reap Rewards as Value Is Top of Mind
Third quarter earnings reports have chronicled how retailers including Walmart, Costco, and TJX are benefiting as shoppers seek value and trade down. Meanwhile, double-digit gains by Coach parent Tapestry Inc. and Ralph Lauren have demonstrated the stronger spending power of higher-income customers.
Moody’s chief economist Mark Zandi told USA Today that surging stock prices, record-high home values, and years of pandemic-era savings have boosted the purchasing power of upper-income households. On the other hand, consumer confidence among middle earners has fallen to its lowest point since mid-2022, reflecting growing anxiety among families facing higher costs and limited financial breathing room.
He wrote on LinkedIn, “An increasingly K-shaped economy can’t be good. It means the economy is highly dependent on a small group of the well-to-do, who, in turn, spend based in significant part on how their stock portfolios are performing. The increasing angst of Americans, evident in consumer sentiment surveys, our mounting societal ills, and our fractured politics, is likely at least in part due to the K-shape.”
Not All Experts Agree on the K-Shaped Economy
Among skeptics of the influence of K-shaped economy, Lindsey Piegza, chief economist at Stifel, Nicolaus & Co., told The Financial Brand the economy should be more accurately described as “E-shaped” as middle-income consumers have the capacity and have shown a willingness to take on debt to maintain spending levels, borrowing against assets like 401(k) accounts.
Kearney, in a research report, warned that fixating on income levels undervalues other factors driving spending. The consultancy wrote, “Many brands have responded to perceived pressure by racing to the bottom on price or quietly degrading quality. Others have doubled down on premiumization, assuming insulation at the top of the K. Both approaches miss the same reality: consumers across the spectrum are increasingly sensitive to value mismatches, not just price points.”
The Financial Times recently stated that talk of a K-shaped economy has been overdone. If upper-income households were driving an ever-higher portion of U.S. spending, GDP growth would be slower because higher earners save more, the financial publication argued.
Of the disparity in spending among income groups, the Financial Times reasoned, “A more compelling, if quite speculative, theory: the rapid cooling of the job market (less hiring and lower wage growth even as unemployment has stayed low) has led working people to reassess their prospects for the future and change their spending patterns accordingly.”