The “K-Shaped” Economy: Why the Middle Class Is Getting Crushed

0:28Americans are divided. American pocketbooks right now, what this means for the housing market, and I'll share my opinions about what might come next.

0:41Hey everyone, welcome to On The Market. I'm Dave Meyer. Thanks for joining us. It's pretty hard to read any sort of news right now and avoid headlines with this term, the quote unquote K-shaped economy. From social media to major newspapers to cable news networks, It's the term everyone seems to be using to describe the very unique economic moment that we're in right now. But what does this term actually mean? Is this a real thing? And if so, what trends is it actually trying to describe? What does a K-shaped economy mean for you and me, for investors, and Americans in general as we head into 2026?

1:22So that's the plan for today. We're going to dive deep into this topic, so let's get into it. First of all, I think that this term, K-shaped economy, in general, is an attempt to try and talk about an economy that is pretty hard to describe right now. If you listen to the show often, you've probably heard me say this a lot, but I believe that the word recession is honestly pointless at this point. It doesn't actually even have a definition. I know people think that it's two consecutive quarters of GDP growth, but if you look at the actual definition of the United States, there is no definition.

1:54It's just completely subjective. And the reason it is subjective and it doesn't have a definition is I think that economists and politicians in general want some wiggle room in trying to summarize something that is very complicated and nuanced in a binary way. The economy is just more complicated than that. And I know everyone wants a really simple way of describing things, but unfortunately, that's really not always possible because even in great economic times where everything's growing, there are typically still areas of the economy that are struggling. And the opposite is true as well. Even during years of slow growth or quote unquote recession, some areas are still growing.

2:38Some areas are probably still booming. And so that's why I personally just think this like binary, good, bad, recession, no recession is kind of silly. And it's also why I think a lot of analysts and economists often try to come up with different ways of describing the economy in ways that make sense to people, different ways to visualize the way that the economy is performing. And for some reason, people have just latched onto this idea of using letters, right? You may have heard of a V-shaped economy or a U-shaped economy or an L-shaped economy. The idea here is that they're trying to project growth, economic growth onto a graph, and it might look like a V, for example.

3:18That's like when the economy tanks for some reason, but then rebounds really quickly. The best example of that being COVID, right? Like in April of 2020, everything went down, right? People were super scared. The stock market tanked. But then just like a couple of weeks or months later, there were stimulus. Some things were starting to reopen. The economy rebounded really quickly. A lot of people were calling that a V-shaped economy. If it takes a little bit longer, they'll call it a U-shaped economy. If things are just really bad and not recovering at all, they'll call it an L-shaped economy because they're not growing.

3:54Right now, this new letter that's really picking up steam recently is K. It means that the economy is moving in two directions at once. Just think about a K, right? There's the vertical line. I don't know what that has to do with anything. Don't think about the vertical line. We're really just talking about the upward part of a K and the downward part of a K. That is what economists and analysts are trying to say, right? that there is one part of the economy going up while the other part is going down. So you can probably imagine what's going on here, right? A K is describing a bifurcated or a split economy where one section of the economy is doing great.

4:31It's going up. The other section of the economy not doing so well. It's going down. So which group is which? I'm guessing you probably already aware of this, but people who are already wealthy or who are high income earners continue to do well in the current economy. They are the upper leg. We'll call it the upper leg of the K. And although there have been some high profile layoffs, you see this in tech, you see this in finance, and that probably will continue, in my opinion. These people own stock. They tend to be asset holders. They tend to have retirement accounts. And yes, people who own real estate, they tend to do well because even though we have challenges in our economy, one of the bright spots has been asset prices, right?

5:17We see that cryptocurrency is doing pretty well. I mean, as of today, it's December 1st, I'm recording this. Bitcoin has fallen 20, 30 % off of its high. Bitcoin's still been on an amazing run over the last couple of years, has have a lot of cryptocurrencies. The stock market continues to be near all-time highs. Real estate in nominal home prices hasn't fallen on a national basis. So the wealthy who tend to own assets continue to do well. They are sort of that upper leg of the economy. The downward arm of the K is lower wage workers, gig workers, service workers, people in hospitality, and honestly, the middle class.

5:58Like, this is not necessarily just lower wage people. It's just what I would call ordinary Americans who work for a living and who are just trying to get by that group of people. and that is a very big group of people, tend to not be doing so well right now. If you look at pretty much all the data of how they're spending money, their consumer sentiments, their savings rates, all of the data shows that this very large majority of the U.S. population is struggling right now. And this split, the fact that wealthy folks, high income earners are doing well, while the middle class and lower class are not doing so well, is on the mind of the Federal Reserve.

6:39It's on the mind of the administration and policymakers. In fact, in one of his most recent statements, Fed Chairman Jerome Powell said, quote, consumers at the lower end are struggling and are buying less and shifting to lower cost product. But at the top, people are spending at the higher income and wealth bracket. So this is a real thing. Like when you see people talk about the quote unquote K-shaped economy, in my opinion, it's real. We are really seeing a big split in behavior, in sentiment, in spending power. And those things do really matter. And again, I just want to reiterate why I think this is a reason why the word recession is kind of useless is because right now GDP is how a lot of people measure recession.

7:26Again, that's not actually how it's measured, but a lot of people use that as a benchmark and it is a useful benchmark. don't get me wrong, but GDP is not the entire economy. We are seeing right now that GDP is going up, but the majority of Americans are saying that they're struggling. Their sentiment is down. They can't afford expenses in an emergency. Those things are a problem that are not reflected in GDP, which is why we're digging into this topic in the first place, because whether we're in a recession or not is not going to tell you what's actually happening with ordinary people. And as investors and just ordinary people, Americans, we actually want to know what's going on with our own pocketbooks, what's going on with our tenants, what's going on with our buyers and sellers.

8:08And so this K-shaped economy, I think, actually does a better job right now describing what's going on than the idea of recession or no recession. So that's my take on the K-shaped economy. But we got to get into what this actually means for the future of the economy, where things can go from here, what this means for the housing market. it. We're going to get into that, but we do have to take a quick break. We'll be right back. What if I told you you could forget everything you know about investment property loans? Because Host Financial is rewriting the rulebook, tossing out those pesky DTI restrictions.

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10:37Welcome back to On the Market. I'm Dave Meyer talking about the K-shaped economy. Before the break, we went over what the K-shaped economy is. It basically means that by a lot of measures, not by every measure, but by a lot of measures, the American economy is split. We have an upward leg, which is wealthy folks who continue to do well in the economy. And then there are normal folks, people who are in the middle class or lower class who are generally struggling right now. And I'm guessing that if you follow the news, you've heard some stories about this, right? I'm sure this is not a shock to everyone that the wealthy are doing fine, spending as usual, and the rest of the U.S.

11:17is starting to pull back. One particularly notable, and honestly, this is hard to even conceptualize the stat. This is so crazy. The top 10 % of Americans, just 10 % of all people who live in this country, now account for 50 % of spending. And according to economists and former guest on this show, Mark Zandi of Moody's, He said, quote, their financial situation is about as good as it's ever been. Now, if you are in that group, you might resonate with this and say, yeah, things are actually going really well in the economy right now. But if you're in the middle class, you're not in that group. I'm guessing you don't resonate with that and are not feeling like the economy is working particularly well for you.

12:04Now, we'll get into this a little bit more, but I just want to call out the reason this stat is so crazy. I'm just going to rattle off a few things for you right now. But American consumer spending makes up 70 % of GDP. So all of the economic activity in the whole country, 70 % of it is just normal people spending their money. I know a lot gets made about government spending or business spending, but in the United States, we are very much a consumer economy. 70 % of GDP is consumer spending. And what I just told you before was that 50 % of consumer spending is going to just 10 % of Americans. So if you put those two stats together, that means that this spending behavior of the wealthiest 10 % of Americans is 35%.

12:49One third of our entire economy is dependent on this 10 % of Americans and just the everyday decisions they are making with their money. And we're going to move on to sort of why some of the things in the K-shape economy are happening. But I want you to remember that stat as we go on and talk about what this actually means for the future of the housing market and the economy in a couple of minutes. So let's first, though, talk about why this is happening. There are a lot of things going on here, but I'm going to just pick some of the big buckets that have been going on. So first and foremost, it is inflation.

13:24That's the thing that's really on people's mind. Now, there are some structural long term things that have been going on for even further, which I will talk about in a minute. But when people answer surveys about why they're not spending, why they're worried about their financial future, inflation is largely the answer that they give. And it's important to note that inflation is a lot better than where it was in 2021 or in 2023. We haven't gotten our reading of September yet. It's December now because of the government shutdown. But as of its last reading, it was about 3%. It's supposed to come out this Friday, actually.

14:00So I think the day after the show comes out, we will get that inflation print. There are some advanced studies into this. People think it will go up a little bit. Again, that would be the fifth consecutive month where it goes up. But it's important to note we're not at 9%. We're not at 8 % where we were in 2021 and 2022. But I think what's going on here is it's the aggregate, right? It's five straight years of inflation. From 2008 to 2020, we really had very low inflation in the US, historically low. Lower than normal, right? 1 % inflation, like we saw many of those years, is not normal. But people got used to that, right?

14:38People got used to prices staying relatively stagnant in an aggregate way. And then all of a sudden, over the last five years, the CPI, the Consumer Price Index, has risen 25%. That's a lot in five years, seeing prices across the board go up 25%. And although in the last year or two, we have seen wages keep up, if you just look at the last five years, wages have not kept up. So in real measurable ways, people have lost spending power. Like that is just how it works. Even though most people have seen their paychecks go up over the last five years, inflation is higher. And so when you actually talk about how far your dollar goes, how far you could stretch your paycheck, it has gone down in the last five years.

15:24And this is honestly a trend that has been going on for decades. Yes, during the 2010s to 2020, we had a reprieve from this for a while. But if you look at real wages, how well wages have kept up with inflation for the last 41 years, since 1984, which is as far back as I have good data, since 1984, real wages, which is just adjusted for inflation, have only grown 12%. And so when I think about this, I often just think about the aggregate for 40 years. Yeah, up 12 percent. Fine. That's not great. Right. We've seen the economy just absolutely explode in those 41 years. And the average American's only getting 12 percent better spending power in 41 years of economic growth.

16:11Like, that's terrible. Like, if you want to know, in my opinion, the real reason people are mad about the economy. Everyone's mad about the economy. Right. Except if you're in that top 10%, right? The real reason is this, right? People's wages are not keeping up with inflation and their spending power is going down. Like this is terrible, in my opinion, for economy as robust as ours. And I just want to call out that, yes, it has been particularly pronounced for the last five years. And I think if most people were asked, why are they mad? Why are they concerned about the economy? they'd say the last five years, which I get it because it's a big change from where we were in the 2010s.

16:50But this has been a problem with our economy for over four decades. I just want to call out that when I talk about the aggregate impact, this is sort of what I'm talking about. This is a longstanding problem. But yes, it is true. It has become more acute and people are particularly stretched right now. So this is happening across the board. Like everyone feels inflation, right? But this is probably self-evident. Those who have less wealth or lower wages are less able to withstand the challenge of high cumulative inflation for five straight years, right? It's not hard to imagine that, right? That just kind of makes sense.

17:29Like the bottom 50 % of households control only two and a half percent of total household wealth in the United States. They have less cushion. That 10 % that they were talking about, that just 10%, they hold 67%, two thirds of all the total household wealth. And so inflation for these people at the top who have all of this wealth is not going to impact them as much. Yeah, they still pay higher groceries, but they just inherently have more discretionary spending. Their asset prices are up. And so for them, continuing to spend is generally not as hard. But for those with lower incomes, lower wealth, who have lower disposable income, when prices rise, they have less cushion to dip into to pay for everyday expenses.

18:16So this is the main reason, in my opinion, why we have this K-shaped economy is that wages are not keeping up. Things are too expensive because of inflation. And even though the inflation rate has come down, still above the Fed target. It has grown for four consecutive months. And it's the cumulative effect of the last five years that is really starting to wear on people because they've been making things work for five years and it's getting harder and harder to do it. So that's the number one. The second thing, though, of course, I sort of alluded to this before is just asset prices, right? Wages have stagnated.

18:51Like I said, I think that's one of the main areas, but asset prices have certainly not, right? Because even though for 40 years, we've seen somewhat stagnant wage growth, stock market in just the last decade is up 200%. Housing is up 50%, depending on who you ask, 40, 60%, somewhere in there. So people who have owned and held onto assets in previous expansions are still doing really well. This is why, again, we'll talk about this in a minute, we're not seeing force selling in the housing market. This is why people who own stock are continuing to spend and feel good about the economy. And more and more people have been starting to own stock, which I think is a good thing given the way our economy works right now.

19:34Things like Robinhood and EFTs and low-cost index funds. These things have made the stock market more accessible to the middle class and to normal people. But still, this is another crazy stat. 1 % of Americans own 50 % of all the stock. And so, So again, this is why you see this concentration of belief and spending in the economy at the top. It's people who own assets. The third answer that I think we need to talk about besides just stagnant wage growth and asset prices is debt. And even though debt is used throughout our entire economy, we have a lot of debt in this country. Most of the quote unquote bad debt is concentrated in lower income households.

20:15This is stuff like credit card debt, student loan debt, auto debt. If you don't want to default, you really can't scale back on those things, right? You got to pay your student loan debt. You got to pay your auto debt. You should be paying your credit card debt. Those interest payments need to happen. So consumers get squeezed elsewhere, right? They pull back on spending in other areas of their life because these groups tend to have more debt. So when you look at these things in aggregate, it kind of makes sense, right? Between inflation, the difference in asset prices, the difference in types of debt that people own, it sort of makes sense that there is a K-shaped economy.

20:52I want to be clear, though. I'm not saying that just because it makes sense that this is a good thing or I like this or I want this to happen. It is the opposite. I think it is a stain on our economy that only one part of the economy, the wealthiest part of our economy is going well and everyone else, the other 90 % of people are not doing as well. I don't think that's good. I'm just saying when you look at the data and you measure it, that is what is happening in the United States right now. That is what is reflected in the data. And if you dig into it, you can make sense of why that is. So that's the detail.

21:26That's why this K-shaped economy is emerging in the United States. But what does it mean? What are the implications for the housing market and for real estate investors. We'll get into that right after this quick break. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of the smartest ways to protect and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly.

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