K-Shaped Economy Drives US Consumer Spending Divide in 2025
The US economy concluded 2025 with a defining characteristic: a “K-shaped” economic reality, reflecting a significant divergence in economic trends across different income groups. Throughout the year, the gap between those thriving financially and those struggling under the pressure of inflation and a softening labor market widened considerably. This disparity manifested in shifting consumer sentiment and dramatically different spending patterns. As of November, the unemployment rate had risen to 4.6%, a four-year high, while simultaneously, nearly two-thirds of respondents in the University of Michigan’s Consumer Sentiment Survey expressed expectations of rising unemployment in the coming year. Joanne Hsu, director of the survey, noted that sentiment remained nearly 30% below its levels from December 2024, primarily due to ongoing concerns about “pocketbook issues.”
A report issued by the Bank of America Institute on December 22nd revealed a striking trend: spending among the top third of the income distribution increased by 4% over the previous year in November, representing the fastest growth in four years. Conversely, spending from households in the lowest third of the income distribution rose by less than 1% during the same period. This divergence underscored the core dynamic driving the economy – a clear bifurcation based on income levels. Consumer spending reflected this trend, creating a distinct “K” shape when viewed through the lens of economic activity.
The underlying cause of this division related to strong inflationary pressure and a significant increase in tariffs, contributing to higher prices on a wider range of goods. This situation was further compounded by the age and asset-based differences among the population. As observed by Will Auchincloss, Americas retail sector lead at EY Parthenon, “If you’re generally older and have a lot of assets, particularly in the stock market, then you’re feeling pretty good about life. If you’re not in that bucket, you’re not feeling as optimistic.” This created a reality where those with established wealth – particularly those invested in the stock market – experienced a favorable economic outlook, while those without such assets faced increased financial pressures.
Throughout 2025, earnings reports from major US retailers showcased the tangible effects of this “K-shaped” economy. Retailers strategically focusing on value and low prices performed strongly, attracting investors and boosting their share values. Walmart (WMT) and off-price retail chain TJX (TJX) both outperformed the S&P 500 (^GSPC) significantly. This success stemmed from consumers actively seeking ways to manage their budgets in response to economic uncertainty. Joe Feldman, an analyst at Telsey Advisory Group, explained that “Everybody’s looking for ways to save money and to be more frugal,” and the middle and lower portions of the income distribution were intensely focused on essential needs. Walmart, referring to its US consumers as “choiceful,” repeatedly highlighted this shift in consumer behavior in its earnings reports. Similarly, dollar store chains like Dollar General (DG) and Dollar Tree (DLTR) reported an influx of higher-income shoppers, as household budgets narrowed amidst economic worries. Dollar General CEO Todd Vasos noted that the company was “pleased to see growth once again in our total customer count,” with disproportionate growth coming from higher-income households. Dollar Tree reported 3 million new shoppers across all income brackets during the quarter, with roughly 60% of these new customers originating from households with incomes exceeding $100,000.
Looking ahead to 2026, analysts predicted that this trend could continue. Feldman cautioned that “we have not seen the worst of the tariffs yet,” which could put upward pressure on prices across even more goods. Some sources indicated that retailers may delay passing higher prices to consumers in the first quarter of next year to maintain robust holiday sales. The National Retail Federation reported for the first time that Americans would likely spend a trillion dollars during the holiday season. Bank of America suggested this “K” shape won’t impede overall economic growth for some time, as the bulk of US consumption comes from higher- and middle-income households. In the third quarter of 2025, the US government reported that GDP growth rose at a 4.3% annual rate, driven largely by consumer spending, with final sales to domestic purchasers increasing by 3%. Michael Pearce, chief US economist at Oxford Economics, noted that “continued strong gains in consumer spending, particularly on services, are driven by recent wealth gains, with real disposable incomes essentially flat on the quarter." He further emphasized that “the K-shaped consumer is alive and well."
Brooke DiPalma is a reporter for Yahoo Finance.
