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Over the past 12 months, investors and consumers have settled on the idea of a ‘K-shaped economy.’ Whether it’s work or spending, the K-shape depicts a growing divide between the wealth of the rich and everyone else. Those at the top of the pile are trending higher, while those struggling are pushing lower.
But new analysis from Bank of America suggests that the trajectory of middle-class consumers is now moving away from those at the lower end of the income spectrum: These consumers are not as well off as rich people, but their spending power is not as reduced as poor consumers.
A look at the BofA data shows that the shape is no longer a K. If we stick with the alphabet theme, one might suggest that an ‘E’ has emerged.
In a note published yesterday by six BofA economists, the group wrote that the “income-based divergence in spending and wage growth continues, and we are concerned that a ‘K’ shape is opening between higher income households and middle income households, with the current gap in lower income households.”
Citing internal data, the group said that in January the growth in spending between higher-income households and all others was the largest since mid-2022, the peak of growth in spending during the COVID-19 pandemic. Annually in January, higher-income consumer spending on credit and debit cards grew by 2.5%. Lower-income households grew just 0.3% while middle-income was relatively flat at 1%.
“A similar pattern emerged in after-tax wage growth, with the gap between upper- and middle-income households at its largest in nearly five years,” added the BofA team. “While wage growth among higher income households was 3.7% YoY in January, a solid improvement from 3.3% YoY in December, wage growth among middle-income families saw only a slight improvement, rising to below 1.6% YoY in January from over 1.5% in December.”
While the discussion of K-shaped economies has become more prevalent during the recent surge in the debate about affordability (and what recessionary the real economy feels like, as opposed to the growth of concentrated sectors such as technology) echoes of the growing divide can be traced back decades: The Fed began monitoring the distribution of household wealth in Q3 2010, and reported that total wealth equaled $60.76 trillion. Of that, the top 0.1% owns $6.53 trillion, and those in the top 99% to 99.9% percent own $10.75 trillion. In contrast, the bottom 50% shared only $330 billion.
Fast-forward to Q3 2025: The wealth of the bottom 50% grew by 1,189% to $4.25 trillion—although still significantly behind the wealth held by the top 0.1% even 15 years ago. The top 0.1% saw their wealth grow 281% to $24.89 trillion, nearly six times the wealth held by the bottom 50% combined.
Savvier consumers
Since the end of the pandemic, Wall Street has been pleased and surprised by the strength of the US consumer, especially amid high interest rates and a higher cost of living.
When it comes to debt, those at the sharpest end of the economy are struggling: The New York Fed reported this week that while delinquency rates for mortgages are near normal historical levels, the deterioration is concentrated in areas with both low incomes and declining home prices. That said, while the shifts to early delinquency came from mortgages and student loans, all other types of debt held steady.
BofA data tells a similar story: The share of households that pay their entire credit card balance each month has increased across all incomes and generations compared to 2019. For example, taking an average index reading of 100 for 2019, low-income youth in January 2026 resulted in a near-20 point increase. The trajectory is similar, although less pronounced, among Gen X and older generations (baby boomers and traditionalists).
Consumers’ bank balances were strengthened by factors such as wage growth and lower gas prices, which offset other inflation. But BofA said shoppers are also getting smarter, the “trading-down” phenomenon. The report says: “The growth in household spending is higher in value groceries than in premium grocery stores from 2022 to the beginning of 2025. And while middle and higher income households’ spending spending was relatively consistent last year, lower income households’ growth in value groceries exceeded that in premium grocery stores for five years.”
