Is the US economy really K-shaped?

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0:34Everyone is talking about the economy. We're bringing prices down, but they came up with the new word, affordability. And there's been one way a lot of people have been describing that economy lately. K-shaped economy. The K-shaped economy idea. The letter K. We're going to get into that K-shaped economy and unpack what it means for Washington.

1:03This is Swamp Notes, the weekly podcast from the Financial Times, where we talk about all the things happening in U.S. politics, finance, and the economy. I'm Mark Filippino, and I hope you had a great Thanksgiving if you're joining us from the States. This week, we're asking who is doing well in U.S. President Donald Trump's economy. Here with me to discuss is Rob Armstrong. He's the FT's U.S. financial commentator. Hi, Rob. Hey, it's great to be on the show. And we've also got Claire Jones, the FT's U.S. economics editor. Hi, Claire. Hello, Mark. So can we start with a definition? This show is brought to you by the letter K.

1:37What is a K-shaped economy? I think the best way to say it is a K-shaped economy is one where inequality between the haves and the have-nots is rising, hence the K. It's kind of, you've got the top half of the K moving further out from the bottom half. And that, I think since the pandemic, if not before, is how a lot of people have discussed the US economy. Right. There was a time, if I remember correctly, that things were a V, right? There was a V-shaped economy where the economy plummeted and then it jumped right back up and it made a V. But now that's out of fashion and we're all talking about the letter K now.

2:16Why are people saying that this is where the economy is at, where there are people winning in this economy and losing in this economy? Claire, you want to take that? I can take that, yeah. I think there are a few reasons why. I mean, the top part of the K is doing well because of what economists often refer to as a wealth effect. the housing market relative to other international markets in the US has done well since the pandemic. So there's the sense in which the holders of wealth, which tend to be the highest earners, have done disproportionately well. The new part of the story is what's happening to the bottom half of the K.

2:56Since the pandemic, the US labour market has been pretty strong. It now looks as though it's cooling quite a lot. And what that means is that people at the bottom end of the labour market, we are seeing they're more prone to cyclical factors and they're not seeing wage growth occur as fast. And that's set to worsen in the new year. We see the implementation of some of Trump's tax and spend policies. We're going to see a lot of people's health insurance premiums go up or Medicaid be removed for some of the very lowest earners. So there's a sense in which the bottom half of the K is seeing things worse and quite substantially.

3:40Rob, what do you make of this idea of a K-shaped economy? Because I know that you've got some opinions. I never have a shortage of opinions. Sure, that is for sure. I mean, where I get it as a person who follows finance and the stock market and other markets as much or more than I do the economy in general is I hear it from companies. So listening to what executives have had to say in the third quarter earnings report season, it's been a kind of who's who of major consumer facing companies saying they see different kinds of consumer behavior from the more well-to-do and the less well-to-do. We've heard this from Coca-Cola.

4:27We've heard it from Chipotle. We've heard it from McDonald's. And we heard it quite recently from Walmart. And I think Walmart's a good sample. It's such a big, important American company that serves so many Americans. I think it's worth repeating what their CEO said. He said, spending with upper and middle income houses is driving our growth. We continue to benefit from higher income families choosing to shop with us more often. Middle income households have been steady while lower income families have been under additional pressure of late. This is so surprising to me, Rob, because these businesses are often associated with lower prices, right?

5:12Like Walmart was about rolling back prices. McDonald's had the dollar menu. You know, Chipotle is considered fast food, which is often associated with lower prices and therefore should be attracting in lower income people, right? Yeah, I would throw, and here's where Armstrong's opinions come into play. I would throw a bit of caution. I'm always a little bit suspicious of a simple and appealing narrative about the economy. And I think especially one that has as cute a name as K-shaped. Well, what letter would you use to use? I mean, what I want to say, I'm all in favor of letters and my alphabet skills are excellent.

5:57I would have to both know. Lowercase Q shaped economy. But what I would say is if you look at the data that we, the kind of macroeconomic data that we have, it's actually not all that clear that very much has changed recently. So if you look, for example, at the Fed's excellent distributional accounts, which is this project they have where they try to figure out who has what, actually wealth inequality since the pandemic has, if anything, gotten a little less severe, largely because while the lower half of the wealth distribution doesn't tend to have many assets. Many of them do own their homes, many of these families, and they've experienced some home price appreciation and so forth.

6:50But I think Claire really hit the nail on the head when she talked about wage growth. I think what we, we've seen a big change. There was a moment maybe two, three years ago, kind of in 22, 23, remember back when it was really hard to hire people and the jobs market was really tight, inflation was running a little high. At that time, quite unskilled workers were immensely in demand and they could kind of have their pick of jobs. And over the last couple of years, that's reversed. So they've really seen the labor market switch around on them. And I think that part of the story is absolutely true.

7:33I think that's exactly right on the labor market figures. I mean, it actually predates the pandemic. I've been quite surprised looking at the excellent data that the Atlanta Fed puts together. I think it was around kind of 2016, 2017, where, you know, the US labor market's been that strong for that long that, you know, we've seen the lowest paid workers see a bit of catch up in terms of wage growth. And then, as you say, wage growth really took off for many income groups, but especially for lower paid workers after the pandemic. It was a great, I agree strongly. And the way I put this is, it's not that there has been a very big change in levels of wealth or income recently that would explain the changes in consumer behavior.

8:20What has changed is the prospects for lower income households. It looks like what they're seeing is they were in a world a few years ago where they could switch jobs and get paid more. There was a lot of other jobs to switch to. There were opportunities they were moving up. And now their prospects for future improvement have dimmed. And they're responding to that with their buying choices when they walk into a Walmart or Chipotle or, you know, go to buy the small cans of Coke or the big cans of Coke. Or not choosing to do those. Yes. Because it It sounds like the consumer sentiment is down for these types of people that we're talking about.

9:00I mean, just to kind of have a note of caution on some of that consumer sentiment, I got to the U.S. in April. It looked as though this year was going to be one where the U.S. economy was going to be teetering on the brink of recession or see, you know, quite a sharp slowdown in growth. That hasn't happened. And a big reason why it hasn't happened is because consumption has held up. I mean, American shoppers are still spending. So there's a degree to which some of this may reflect that the higher earners, you know, spend more. But we also know that it's usually middle or low income people who spend more of their income on consumption as a proportion of that.

9:36But, you know, for all the kind of bleakness in the consumer sentiment, we have had very, very strong consumption for the U.S. economy this year, which, you know, has really exceeded expectations from back in the spring. Back in the spring when Donald Trump, of course, announced his tariff plan on Liberation Day. That does bring me back to politics. Unfortunately, we do have to break from this awesome economic conversation to talk about politics because we are swamp notes. And I think our listeners will get upset if we don't. But this confusing economic picture is in part why, you know, the president is coming under fire for the lack of affordability or what is perceived as the lack of affordability.

10:17Does the White House look at this and see it as a weakness? I think it's really hit home in recent weeks, actually, with the results of the New York Merrill race and some of the governor races for several states. We know this was a massive issue for Biden, and it seems to be a massive issue for Trump as well. And I think people are still saying there's a cost of living issue. I'm living month to month. And that's being reflected at the polls and the problem for the White House. The president ran on this issue. Right. Right. Exactly. The president said. And he won the election on this issue, frankly.

10:52And he won on this issue. And I think it's very clear that he now sees it getting away from him. But is there anything that President Trump and his administration can do more do in general or more of to alleviate some of the sentiment that we're talking about here? I mean, I think you see the bit of the about turn on tariff policies. I mean, this$2 ,000 dividend that Trump has said he's going to give lower middle income households. We've also heard senior White House officials and Trump has implemented this of saying they're going to take tariffs off a lot of food products. So there is a sense in which they're seeing that as part of the issue.

11:36They know that people are very concerned about a few kind of notable products. I think they've mentioned bananas and coffee. Two other areas I would mention where it seems that the White House is being activist and will continue to be activist are drug prices. They're trying to jaw drug prices down and jawbone drug companies into getting the prices of drugs down. They know that's a pain point for consumers. And also right from the beginning, this administration has been very focused on interest rates, especially long-term interest rates, which are linked to the price of mortgages. Huge aspect of the affordability crisis is the affordability of owning a house.

12:19And both the president and Treasury Secretary percent are very clear that they have their eye on the 10-year Treasury yield and they mean to keep it down. And so I would think that you'll see more of that in months to come. More activist interventions in the bond market, more pressure on drug companies, more backing off on tariffs where it pinches. I mean, we've seen them talk as well just on the housing affordability about the idea of 50-year mortgages, which hardly any economists seem to think is a good idea for house buyers. One that has got a little bit more support among economists is this idea of kind of like portable mortgages where, say, you got a very good deal a few years ago, but now your circumstances have changed and you want to move that you could kind of take your low interest rate mortgage with you.

13:14Now, that doesn't sound the worst idea in the world to me, but it'd be, yeah. To your point, Mark, if I can just say one thing. Yeah, please do. One thing that is terrible about being president is that you are held responsible for an economy you have relatively little control over. That's, yes, that is a really, really good point. There are so many other factors that are outside of Trump's control. And they have a few levers they can pull and they pull them as hard as they can, but they need a little luck too, or I should say a lot of luck. Even if Trump and his administration do throw the kitchen sink at the economy, is that still going to be enough in the short term to make real impact so that people are feeling better about the economy?

14:04I mean, that's a big question. I mean, you know, most people like money, right? Most people like, you know, stimulus checks in one form or another. They do until they don't, right? Well, exactly. It gives a short-term lift. But if you've got, I mean, the kind of 2K check, I mean, it's, you've had maybe a lot less than people have expected, but some inflation caused by the tariffs. And then if you're going to give people that money back in a dividend, then you risk having inflation again. And then if you heap on that, lower interest rates, you know, you raise the risk of inflation further. So, I mean, it's that issue again.

14:45I mean, you know, people might like free cash, but what we know from the Biden administration is people hate inflation. Boy, do they. Oh, boy, do they. I mean, I think you're dead right, Claire. I think they're playing, they're going to have to strike a damn fine balance in the next 12 months. because if inflation - A soft landing, if you will. Yeah. You know, if inflation starts to perk up and we're heading up towards 4 % inflation again on the core measure, all of this fiscal and monetary largesse starts to look very dangerous indeed. And I don't know what they do then. By the way, have we landed?

15:23Are we still in the air? Where are we? Have we had that soft landing yet? I think we landed. I think we had it. Have we landed? All right. Claire, what do you think? I say, yes, we are on the ground. Yeah, we're on the ground. Very good. We can move on. Unbuckle your seatbelt. We're ready for talking to our headlighters. And we're back up in the air. Quick layover. I think in terms of a connecting flight, this is also going to be my opportunity to take a quick break and come back in a little bit.

16:01I'm Huma MacArthur, chairman of Bain & Company's Global Private Equity Practice and host of Dry Powder, a podcast where I sit down with some of private equity's leading investors, such as TPG's Jim Coulter. Somehow the industry keeps growing. KKR's Pete Stavros. Driving operational change is really hard. And Vista's Robert Smith. As a market dampened, guess what? We were able to monetize 18 companies. And of course, I'll take you behind the scenes of Bain's latest research, including our newly released mid-year private equity report. Subscribe to Dry Powder today.

16:34All right. So normally this would be the place where we answer one of our listener questions, but this week it's Thanksgiving in the U S I'm still working off yesterday's Turkey. And I want to pose to both of you guys. What are you thankful for? Rob, you want to start? I'll tell you what, I'll tell you what I'm thankful for. I got a family and you know, we're all big eaters. and I think the U.S. big box store, we were talking about Walmart, comes in for a lot of hell for different reasons. I just love going into a Costco or a Walmart and, you know, buying food that's really affordable at these places.

17:11And I think there's a lot of reasons to have mixed feelings about big corporate retail monsters, but one great thing that they do is they get us food that is affordable. and man, I appreciate it. I'm thankful for it. So I'm going to run directly counter to that. I am actually thankful for being able to pay a little bit more in order to get everything delivered to my doorstep because I am sure, Rob, you can attest to trying to make time to grocery shop or do any other type of shopping when you have a toddler in the house and have the option of having something show up in a box neatly at my doorstep and all I have to do is tear it apart with an electric pair of scissors that I also bought online.

17:57So I am thankful for online shopping. Claire, what are you thankful for? I think there's a lot to be thankful for in terms of the US consumer experience. I've got to say, I've been appreciating it too. I mean, the stuff that you can get delivered online, it's fantastic. I'm less thankful for the cost of things. Things do feel pricey here. Yeah, pound of coffee, holy crow. Yeah. Yeah. Well, thank you for bringing it back to our core subject matter, Claire. I'm going to take this opportunity to thank our guest. Claire Jones is our U.S. economics editor. Thanks, Claire. Thank you, Mark. And Rob Armstrong, the FT's U.S.

18:33financial commentator. Thanks, Rob. That was a lot of fun. And I want to hear from you guys, too, about what you're thankful for. There's so much doom and gloom that we cover in new shows. It'd be really nice to hear what you guys are psyched about. Just send me an email. My address is in the show notes, and I'll say it again. send us a voice memo. Tell me your name, where you're from. We might even play it on the show.

19:00This is Swamp Notes, the US politics show from the FT. If you want to sign up for the Swamp Notes newsletter, we've got a link to that in the show notes. Our show was produced by Henry Larson. It was mixed by Sam Giovinco. We had help this week from Lauren Fidor. Special thanks, as always, to Pierre Nicholson. I'm your host, Mark Filippino. Our acting co-head of audio is Topher Forges. original music by Hannes Brown. Check back next week for more U.S. political analysis from the Financial Times.

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