C is for C-shaped economy

0:01NPR.

0:06This is The Indicator from Planet Money. I'm Waylon Wong. And I'm Patti Hirsch. We're always looking for clean and simple ways to describe the economy to make it easier for all of us to understand what's going on. And recently, that's extended to using the alphabet. The big theme here is the so-called K-shaped economy. The results highlight what some observers have called the K-shaped economy. Why the letter K? What do you mean by that? I know, it sounds like Sesame Street. Sesame Street, the platonic ideal of explainers. The K described an economy that was diverging, with the rich getting richer and the poor getting poorer.

0:44Not the kind of thing an administration likes to hear with the midterms coming up. Not even a Republican administration. I got sick of hearing about this K-shaped economy. This is Scott Besant, Secretary of the Treasury, speaking to CNBC last week. I can say here definitively the K-shaped economy is over and we're seeing more of a C economy.

1:07Oh, a C economy. What's a C economy like? I don't like the top going down and the bottom coming up. That's got a rather socialist whiff, wouldn't you say, Whelan? I'm wafting it. And is it even accurate? it. On today's show, we'll look at the sesame streeting of the U.S. economy to ask what all that lettering tells us, if anything, about the state of things. And if we were going to choose a letter to describe the economy of today, what would it be? That's coming up after the break. This message comes from Capella University. You know that feeling when there's a spark building inside you that you were meant for more?

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2:27Dell.com slash Dell-Pro. Built for you. This message comes from NPR sponsor Charles Schwab. Financial decisions can be tricky. Your biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab, can help. Download the latest episode and subscribe at schwab.com slash financial decoder. Describing the U.S. economy as K-shaped really kind of broke eye as a buzz term about a year or so ago. But it's been around since at least 2020 and the early stages of the fallout from the COVID-19 pandemic. There was a period where I think describing the economy as looking like a K was a reasonable description.

3:08Mike Strain is an economist at the right-leaning American Enterprise Institute. The original usage of the term K-shape meant that the poor were getting poorer at the same time that the rich were getting richer. Mike says there's no doubt that happened during the pandemic. But he says the definition of the K-economy has shifted since then. Over the last few years, different people are using the term in different ways. And some people are using it as just another way of describing inequality, which is different than its original usage. because inequality can be increasing even if both more affluent and less affluent Americans are seeing their outcomes improve in an absolute sense.

3:49Let me break that down for you. It is possible for poor people to acquire more wealth and for the gap between rich and poor to widen at the same time, which would mean that wasn't really a K-shape at all. And this is kind of the thrust of what Scott Besant was driving at last week in that interview with CNBC. For working Americans, real wage gains, we can see that the bottom 25 percent of workers had a 2 percent wage gained. I think he's trying to say that inequality is narrowing. And by some measures, I think that that is happening. You know, I think if you look at continuing workers and you look at the average wage of a worker whose highest degree was a high school diploma and the average wage of a worker whose highest degree was a college degree, I think you do see their wage growth converging.

4:39And so you see wage inequality narrowing. Yeah, but not that much, Mike says. And Claudia Sam agrees. The discussion about the K versus the C is really like, are these gaps getting smaller or bigger? But to me, like, the gaps are important to begin with. Claudia is an old friend of the show. She's also an economist at New Century Advisors, an investment management firm. She's also the inventor of a recession indicator called the SAM rule, which we profiled on the show in 2019 when the rule was created. I'm not big on the alphabet for the U.S. economy. Claudia the Grouch. Yeah, maybe she likes numbers more, like the count.

5:16Ah-ha-ha-ha-ha. Oh, oh, oh, oh. Claudia says if you want to understand the entire U.S. economy, focusing on incremental movements at the top and bottom ends of K or C or whatever isn't that useful. For one thing, these letters track the acquisition of wealth, not the state of the economy. And they kind of miss the point. Yeah, Claudia points to Federal Reserve data that show that the top 1 % of Americans own one third of all the wealth in the country. But the bottom 50 % of Americans own less than 3 % of the wealth. This is a massive gap that doesn't really change much from cycle to cycle. One other thing that I think comes up in this debate about the K and the C that's really challenging is, frankly, we don't have very good data to answer this question.

6:07Because everybody's kind of bringing their own data. And it gets really complicated really fast in terms of like what's changing and how much. So it's a good debate to have, but it's a tough debate to really settle just because we don't have as good of data as we have about the overall economy. And we do have good data on the overall economy. Really good data. Really good data. Like last week's jobs report. That saw the unemployment rate easing to 4.1 percent. But it also talked about businesses shutting jobs and hundreds of thousands of people leaving the workforce. So what does Mike Strain think that tells us?

6:44I think that the economy is decelerating from its kind of white hot state in 2022. And that deceleration has been slow and gradual and orderly. Orderly. I like orderly. But deceleration? Doesn't that mean a slowing economy? I mean, isn't that bad? Well, Mike says, not necessarily. Not given where we came from. 9 % inflation, remember. You know, I think a lot of the headwinds facing the economy are the result of policy choices made by President Trump. But I think the economy also has some pretty considerable tailwinds. Yeah, he points to that low unemployment and those incrementally rising wages, but also investment in AI and the surprising strength of consumer spending in spite of stubborn inflation.

7:39Claudia Sam sees all of this too, but like a wise woman reading the tea leaves, she detects warning signs in the data. It is the dismal science after all. She sees mounting pressure on consumers, on businesses, and on the labor market. We have seen a very dramatic slowing in the growth of the labor force. That's come from much less immigration and also a population that's aging out of the workforce. So we are not, the workforce in the U.S. really is not growing at this point. This worries her because it could mean less job creation and possibly less opportunity for younger workers. The worker who's got a job, likes their job, they're really in a quite good labor market.

8:26unemployment rate is very low. Wage growth has been pretty solid. But for people trying to get into jobs, into the labor market, it's not quite a recessionary labor market, but it's not that far from it. Recessionary. The R word. Recessamestreeting again. Are we teetering on the edge? Well, Claudia's famous for creating a recession indicator, but she's not signing the alarm yet. The economy overall is in a relatively good place. OK, well, that's a relief. As for Mike Strain, he's not so worried about the labor market. It's the I word that worries him most of all, inflation. Apart from that, in his view, our gradually cooling economy is kind of getting us back to business as usual.

9:10I don't think we're in a K-shaped economy. I don't really think we're in a C-shaped economy. I think we're just in a normal economy. So the N economy? I don't know, Whelan. Doesn't have much of a ring to it, in my opinion. Yeah, well, I guess that's why we don't work at Children's Television Workshop. Brought to you by the letter whatever. This episode was produced by Julia Ritchie with engineering by Kweisi Lee. It was fact-checked by Sierra Juarez. Kate Concanon is our editor, and The Indicator is a production of NPR.

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