K, C or E? Why economists can’t agree on the shape of today’s economy

C. K. E.

Those aren’t initials or Greek life letters. They’re some of the terms that economists, corporate leaders and politicians are using as they attempt to define the U.S. current economic moment.

Ever since the recovery from the pandemic, a consensus among economists has viewed the economy as acting in a “K”-shape, displaying an unequal expansion for different groups and the arms of the “K” heading in opposite directions.

Now there’s a debate over whether the K-shaped recovery still exists, or if the economy instead resembles the letter “C” or “E.”

“This is some of the alphabet soup,” said Joel Mokyr, a Nobel Prize-winning economic historian at Northwestern University.

The race to label the structure of today’s economy involves more than semantics or bragging rights. In recent years, the divergence among low- and high-income consumers expressed in a K-shaped economy has been top of mind for politicians, monetary policymakers and executives of consumer companies. 

For decades, letter shapes have been used to sum up the economy, especially following major downturns. The list of those that have been employed throughout history includes “V-,” “L-” and “W-shaped.”

But it’s unusual for this type of description to have staying power among everyday Americans several years after a recession, as it does today, according to Don Rissmiller, chief economist at research firm Baird Strategas. Mounting concerns around wealth inequality may be driving heightened awareness, he said.

“During recessions and recoveries, the letters are really popular,” Rissmiller said. “To use a letter in the middle of a business cycle, I guess we could say that’s a little new.”

From K to C

Treasury Secretary Scott Bessent made waves earlier this month when he declared that the K-shaped economy was in the rearview mirror. In its place, the former hedge fund manager said a C-shaped economy was forming, meaning the bottom class of consumers were gaining ground.

Bessent cited wage gains among lower-earners and larger tax cuts this year, pointing to President Donald Trump’s “no tax on tips” and “no tax on overtime” policies as boosting the worst-off.

“I got sick of hearing about this K-shaped economy,” Bessent, one of Trump’s top economic lieutenants, told CNBC this month. “I can say here definitively, the K-shaped economy is over.”

Bessent isn’t the only one giving the “C” letter air time. Hilton Worldwide CEO Christopher Nassetta told analysts late last month that his hotel company is “definitely seeing” a C-shaped economy.

Weakness in high incomes isn’t driving the convergence between the two ends of the class spectrum, Nassetta said. Instead, the chief executive said Hilton’s middle- and upper-middle segments have swung from posting negative numbers to growing at rates as high as 6%.

“The middle class is getting back in the game,” Nassetta said. “It’s really impossible to deny.”

But Anthony Chan, JPMorgan’s former chief economist, said the U.S. war with Iran throws a wrench into this emergent view.

Lower-income consumers spend more of their incomes on energy, he said, meaning they are affected more by surging gas prices as the conflict threatens to keep inflation high. That should mitigate any gains for lower income Americans from White House efforts to increase tax refunds or make homes more affordable, he said.

“I’m the first to say that we can make some progress,” Chan said. “But nothing of the sort of progress that we can say we can bury the K-shaped economy.”

Still a K

Indeed, it’s hard to argue that the K-shaped economy has faded so long as consumer sentiment remains weak and the cost of living shapes up as a defining issue in the midterm election cycle, Chan said.

Consumer sentiment dropped 11% in August from a year ago and was recently near record lows recorded earlier this year, according to the University of Michigan’s closely-followed survey released Friday. Confidence among low- and middle-income respondents took an outsized hit this month, said Joanne Hsu, the survey’s director.

Leaders at several consumer companies said they still see signs of a K economy. 

“The dynamic of a K-shaped economy we see is alive and well in the United States,” said Shane Grant, Colgate-Palmolive‘s operations chief for the Americas, at a Deutsche Bank consumer conference in June. 

Bill Boltz, a merchandising executive at Lowe’s, said last week on the home retailer’s earnings call that the K-shaped economy is one variable that “continues to shape” consumer spending trends. CEO Nicholas Fink at Constellation Brands, maker of Modelo beer and Robert Mondavi wine, told analysts last month the economy even looks “increasingly” like a K. 

Others are finally seeing cracks start to form in the K-shaped economy, years after it grew to dominate economic analysis.

While income growth didn’t appear to show a K-shaped divergence among different income groups between 2021 and 2023, consumption did reflect a clear break, according to a report from a team at the Federal Reserve Bank of Richmond published last month.

The Bank of America Institute said that may be changing. While higher earners had been spending more using credit cards, the institute said the gap across income classes began narrowing in May of this year.

“What was once a ‘K’-shaped consumer is increasingly becoming one of convergence,” David Michael Tinsley, the institute’s senior economist, wrote to clients.

Researchers at the New York Fed also said their latest research into credit card debt showed the K-shaped economy continues to dominate as an economic theme. Combined credit card balances of a near-record $1.26 trillion in the second quarter are evidence “there are a lot of households that live paycheck to paycheck.”

Evolution to E

Others wonder if the economy has evolved into an E-shape after more than half a decade in a K-shape. In this view, there are three distinct classes of Americans that are neither moving farther apart nor converging.

In other words: “Each group has found a way to live,” said Rissmiller of Baird Strategas.

“It may not be the best outcome,” Rissmiller added. “But it is an outcome that looks more stable than not.”

Michael Eisenband, global chairman of corporate finance at FTI Consulting, recently said in a client note that the E-shaped assessment “better illustrates” clearly divergent spending patterns among different income groups. The E can serve as a “more fitting depiction of the times,” he said.

Heather Long, chief economist at Navy Federal Credit Union, said an E-shaped description of the economy may be more accurate than a K because it better captures a middle class that’s just hanging on. A view that low- and high-earners are somehow converging requires “some real mental gymnastics,” she said.

Wyndham Hotels & Resorts CEO Geoff Ballotti similarly told analysts on an earnings call earlier this year that while its middle-tier consumer is “feeling better” and “regaining confidence in purchasing power,” that might reflect either a C- or E-shaped economy.

For other executives, an E-shaped economy, with three income groups on parallel but unequal tracks, remains an alien concept — for now. Scott Thompson, CEO of Somnigroup International, admitted to being out of the loop when asked about an E-shaped analysis on the Tempur-Pedic mattress maker’s earnings call this month.

“That’s a new one for me,” Thompson said. “I was ready for K; hadn’t thought about E.”