What Is A 'K-Shaped' Economy?
Talk of a "K-shaped" economy has been brewing recently—where two groups experience increasingly different financial circumstances. The top arm of the K represents higher-income Americans whose wealth and incomes continue to climb, while the lower arm shows households with weaker income growth and heavy price pressures.
What that means is while higher-income consumers—bolstered by gains in the stock market and rising home values—are still spending, lower-income households are reigning back as inflation erodes their purchasing power and the job market tightens.
This has certainly been true in America: Bank of America Institute data found that in September, spending by lower-income households rose only about 0.6 percent year-over-year, compared with 2.6 percent growth for higher-income consumers—a clear split in spending momentum across income groups.
Powell: K-Shaped Economy is "Clearly a Thing"
When asked by a reporter over how sustainable a K-shaped economy is during the Fed’s rate-setting meeting on Wednesday, Powell said he wasn’t convinced the trend could last, but did acknowledge that the idea of a K-shaped economy was "clearly a thing" showing up in the Fed’s data.
"We hear about this a lot," he said. "If you listen to the earnings reports for consumer-facing companies that tend to deal with low- and moderate-income people, they’ll all say that we’re seeing people tightening their belts, changing products that they buy, buying less, and that sort of thing. And so it’s clearly a thing. It’s also clearly a thing that, asset values—housing values and securities values are high, and they tend to be owned by people more at the higher end of the income and wealth."
Powell acknowledged uncertainty about the trend’s durability. "So as to how sustainable it is, I don’t know. Most of the consumption does happen by people who have more means. The top third accounts for way more than a third of the consumption, for example. So it’s a good question how sustainable that is."
He went on to explain that part of the Fed’s concern—raised during a separate discussion about the labor market—is that job growth may be weaker than the figures currently suggest. Powell said the Fed had been "partially flying blind" on employment data because the government shutdown prevented the Bureau of Labor Statistics from conducting its surveys for two months.
"So the data may be distorted and not just—not just sort of more volatile, but distorted. And that’s really because data was not collected in October and half of November," he said.
As a result, he warned, the available numbers may be overstating job creation, and the economy could instead be losing jobs.
"Gradual cooling in the labor market has continued. Unemployment is now up three-tenths from June through September, payroll jobs averaging 40,000 per month since April. We think there’s an overstatement in these numbers by about 60,000, so that would be negative 20,000 per month. And also, just to point at one other thing, surveys of households and businesses both show declining supply and demand for workers," he said.
This week, the Fed lowered interest rates to a three-year low, with the benchmark rated dropping by a quarter point to a range of 3.5 to 3.75 percent, as widely expected on Wall Street. It was the third consecutive cut in borrowing costs.
President Donald Trump has called for the central bank to cut rates far more aggressively, while repeatedly criticizing Fed Chair Jay Powell. On Wednesday, he said the Fed’s interest rate cut should have been "at least double," while deriding the "deadhead Fed."
"This guy, the head of the Federal Reserve, is a stiff," Trump said, referring to Powell.
Newsweek