Viewpoint
February 27, 2026 | 14:47
Does a K-Shaped Economy Make the U.S. More Vulnerable?
Economics
Economics
Economics
Economics
Economics
Economics
Does a K-Shaped Economy Make the U.S. More Vulnerable? |
| You often hear macroeconomists talking about the K-shaped, or bifurcated, expansion to describe the differing spending behavior of higher-income and wealthier households amid elevated inflation and soaring equity prices against rising unemployment and relatively stagnant wages. So, I thought it worthwhile this week to delve into some of the recent research around this topic to get a better feel for how K-shaped the economy really is, and what that might mean for the concentration of consumer spending and its vulnerability to future shocks. A recent Dallas Fed study explains why there are often conflicting estimates of consumer spending concentration. The authors then take a stab at their own estimates and quantify the potential fragility of the economy to various labor market and financial shocks (https://www.dallasfed.org/research/economics/2025/1125-yang-consume). One measure of consumption concentration, using primarily the Bureau of Labor Statistics Consumer Expenditure Survey data, finds a relatively lower share of consumption by top earners. In fact, these shares have actually been stable since 2004, suggesting the top 10% of earners are responsible for roughly 20% of consumption and the top 20% are responsible for 35% of spending. However, the authors believe these data underestimate the actual concentration of spending due to poor survey coverage of affluent households. |
| A second measure that combines data on income shares and financial flows from the Fed’s Survey of Consumer Finances has much better coverage of higher-income households. This version, in contrast to the BLS measure, shows rapid increases in consumer spending concentration in recent years and results in far higher estimates of that concentration. Recent studies using this methodology conclude that 49% of all consumer spending growth is coming from just the top 10% of earners. The Dallas Fed study largely follows that methodology but also taps into the Fed Distributional Financial Accounts for changes in net worth, and the Bureau of Economic Analysis’s measures of total disposable personal income. That allows them to create estimates of disposable income and savings to better measure the consumption for the top 20% of earners. The Dallas Fed study finds that the top 20% of earners were responsible for 60% of total income, 71% of the total net worth, and 57% of total consumption on average from 2020 to Q2 2025. The concentration of all these measures has increased from the 1990s averages, when the top 20% of earners were responsible for only 54% of total income, 61% of wealth, and 53% of consumption (Chart 1). Using a model, they then compare the impact on aggregate consumer spending from a low-concentration and high-concentration environment (from a benchmark) under a number of scenarios: low-income growth; high unemployment; low rate of return; and, a scenario with both high unemployment and a low rate of return. The shocks were calibrated to be similar in magnitude to modest recessionary periods like 1991 and 2001. Interestingly, they find relatively smaller impacts on consumption from the high unemployment and low-income growth scenarios with the impacts shrinking even more in the high-concentration economy. In other words, more concentration of wealth, income, and consumption reduces the economy’s vulnerability to adverse labor market shocks. However, the vulnerability of consumer spending to a lower rate of return on assets is quite high and goes up substantially under high income, wealth, and consumption concentration. In short, a highly concentrated economy is noticeably more fragile to adverse asset price declines (Chart 2). So, does a K-shaped economy make the U.S. more vulnerable? The answer for a stock market decline appears to be yes, but for a labor market decline alone, the economy is actually more resilient compared to a less K-shaped situation. |
Follow the Bouncing Tariff Ball |
| The Supreme Court’s decision to strike down international emergency tariffs throws some sand into the Administration’s protectionist ambitions, but also prolongs the uncertainty around trade policy. Once the dust settles it probably won’t move the needle on the economic outlook. As widely expected, the Administration lost little time filling in roughly half of the hole in customs revenue dug by the ruling. Our estimate of the average effective tariff rate on U.S. imports plunged from around 16% prior to the Supreme Court’s decision to 7%, only to rebound to 11% once the new duties (of 10%) under Section 122 took effect on Tuesday. These measures are intended to address alleged balance of payments issues and can remain in place for 150 days before requiring congressional approval for extension. Should the global rate be raised to the statutory limit of 15%, the average effective tariff rate would climb to 13%, closing most of the gap left by the cancelled IEEPA duties. And, that outcome could just be a matter of time, as U.S. Trade Representative Greer said tariff rates could rise to 15% or higher for some countries. The new Section 122 duties came with a laundry list of exemptions that broadly mirror the earlier IEEPA carve-outs. Importantly, they preserve duty-free access for USMCA-compliant goods, much to the relief of Canada and Mexico. This suggests the Administration remains mindful of the potential economic costs of tariffs, especially on goods that must be imported and are critical for the smooth functioning of supply chains. Notably, even when the average tariff rate stood near 16%, actual duties collected at the border amounted to only about 11% of the value of imported goods. This reflected several factors, including trade diversion toward lower-tariff countries, firms exploiting loopholes in the duties, substitution away from high-tariff goods, and the complexity of collecting duties amid unclear exemptions. In practice, the lower collection rate helped temper the impact on growth and inflation. Still, Section 122 is just a stopgap measure. Treasury Secretary Bessent noted, “We will get back to the same tariff level for the countries. It will just be in a less direct and slightly more convoluted manner”. Waiting in the wings are additional industry-specific duties under Section 232 (for national security reasons) and country-specific duties under Section 301 (to address unfair trade practices). Many of the required Section 232 investigations have either been completed or will conclude in the months ahead, potentially paving the way for new duties on semiconductors, critical minerals, aircraft, industrial machinery, and other products. Neither trade authorization imposes a statutory cap on tariff rates, meaning the Administration could, over time, largely recreate the pre-SCOTUS status quo if it so chooses. At least the White House does not appear eager to return the U.S. average tariff rate on all countries to the punitive 26% level that prevailed before China’s trade deal last May. In fact, Greer has indicated that President Trump’s meeting with President Xi next month (which could be a flashpoint for markets) is aimed at keeping the average tariff rate on China stable in a 35%-to-50% range; a range that Bloomberg estimates fell by roughly 8 ppts in the past week. Public support for tariffs is waning, with affordability top of mind for households ahead of November’s elections. Unfortunately, the “more convoluted manner” of imposing replacement tariffs will only prolong the uncertainty around trade policy, compounded by the expected difficult negotiations to renew the USMCA. Even so, manufacturers and other businesses appear to be adapting to the new “normal” trade climate, rejigging supply chains and redirecting import flows. With a strong AI-driven tailwind, the economy has already shown considerable resilience in the face of protectionist headwinds. As long as this support continues, and the average tariff rate does not rise materially above pre-IEEPA levels, solid real GDP growth of 2½% is doable this year. |
