“K”-Shaped Recovery Exposes Financial Struggles of Low-Income Consumers as Higher Income Groups Spend Freely Despite Economic Uncertainty

While consumers with higher income levels appear to be continuing their spending patterns despite persistent inflation and economic uncertainty, low-income Americans are facing mounting financial pressures. This disparity is contributing to what is becoming known as a “K”-shaped recovery, where higher income classes benefit the most while lower income Americans struggle. According to a report from Bank of America, mentions of low-income consumers on company earnings calls are at their highest levels in almost two years, with executives from various companies noting that these consumers are pulling back on spending, particularly at fast-food brands. Meanwhile, consumers with higher income levels are opening high-fee credit cards and splurging on luxury goods such as travel and dining out, according to American Express CEO Christophe Le Caillec. However, some low-income Americans are turning to microloans offered by lending firm Upstart, with a surge in originations reported by the company. Upstart’s principal product manager, Blair Lanier, explained that these loans have been used for expenses such as rent and regular bills, with borrowers being more likely to be lower-income individuals with no more than a high school diploma. Some may be resorting to these small loans after being rejected for larger sums by other lenders, while others may be dealing with rising costs of living. The end of Covid-era fiscal stimulus and the resumption of student loan payments have resulted in many Americans drawing upon their savings accumulated early in the pandemic. However, rising gas costs can be particularly painful for those without remote work privileges, while higher-income consumers may be buoyed by rising home prices and strength in the stock market. As a result, lower-income households have seen a decline in economic sentiment, as evidenced by the University of Michigan consumer sentiment index, which fell more than 12% between April and May alone as consumer expectations for future inflation rose, according to data released Friday. Economists have been perplexed by the continued consumer spending despite these factors. However, some companies, particularly those frequented by lower-income brackets, are reporting weaker consumer demand. Companies such as McDonald’s, PepsiCo, and Tyson Foods have reported that diners with less to spend have been pushing away from their establishments due to higher prices, with some switching to private labels from Tyson’s name brand when grocery shopping. This behavior has been observed online over the past four months across numerous categories, including personal care, electronics, apparel, furniture, and groceries, according to data from Adobe Analytics. Lower-income Americans were already facing financial pressures before the pandemic, and while the group has made up ground amid the worker shortage, this progress has been reversed due to a return to more troubled waters as the economy continues unraveling from the 2020 shock, according to Nancy Lazar, chief global economist at Piper Sandler. The “K” shape of consumer habits is making it difficult for lower-income Americans to cope with elevated price tags and interest rates, and the situation is worsening as the labor market shows signs of deteriorating, with last month’s shockingly weak jobs report and a recent jump in unemployment claims adding to the unease felt by lower-income Americans. Overall, the “K” shape of consumer habits is threatening the surprising resilience of the economy, which has been a worldwide marvel. Corporate leaders and economists are pointing to the “K” shape of consumer habits as a reason for lower-income Americans to feel uncertain about the economy’s future, with some indicating that this trend could dash hopes for a “soft landing,” which is a goal outcome where inflation is tamed without tipping the economy into a period of prolonged contraction.