The US Has A K-Shaped Economy, At Least Its Not Pear-Shaped

CHICAGO, IL – OCTOBER 25: Food is served at a Chipotle restaurant on October 25, 2017 in Chicago, Illinois. Chipotle stock fell more than 14 percent today after a weak 3Q earnings. (Photo Illustration by Scott Olson/Getty Images)

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In the context of a political-economic climate in the US where good, regular economic data is hard to come by, commentary from industry leaders as they report earnings is providing some fascinating insights. Chipotle, the burrito chain, reported a surprise drop in revenues because two key consumer groups, households earning USD 100k or less, and younger customers (24-35 years old) are cutting back discretionary spending, even on fast food.

A range of firms with similar client bases underline this trend – car manufacturers report that sales of expensive, large vehicles are strong, but that lower income customers are preferring smaller, fuel-efficient models. McDonalds is revising its ‘extra value meal’ option, and credit card providers like Amex report very different types of activity from rising card balances and distress in the lower segments, to robust spending in its ‘Platinum’ category. In keeping with this last observation a headline in Thursday’s Wall Street Journal ran ‘big spenders keeping the party going’, while commentary from Federal Reserve board member Michael Barr referred to a two tier economy, where the wealthy are thriving.

Economists are blithely referring to this phenomenon as the ‘K-shaped’ economy, whistling past the graveyard of economic history that portends that revolutions are made of such obvious divergences in fortune. Indeed, it is a habit of economists that when they are unsure of the path of the business cycle, they reach for the alphabet. For example, in the aftermath of the global financial crisis, analysts pondered whether we might see a V, W or U-shaped recovery.

Now all of the talk is of a K shaped economy – which refers to multiple divergences between the price insensitive wealthy and those in economic precarity who are sensitive to inflation (this may help explain the election of Zohran Mamdani, but more on that next week), a services sector that is either shedding jobs and holding back from hiring compared to the upper echelons of the technology and finance industries where unprecedented levels of wealth are being created.

There are two other effects ongoing. The first is the economic effect of AI focused capital expenditure (across the energy, logistics and technology sectors). The second, more important trend is a mangling of business cycles, such that few of them are synchronized across geographies, or between the real and financial economies (German chemicals is in the doldrums but German finance is on an upswing).

Yet, granted that we have just witnessed the highest number of job cuts in an October since 2003 in the US, set against the fact that the stock market hit all-time highs (and valuation highs) in October, a better diagnosis might be the ‘Marxist’ economy – one where the owners of capital and the source of labour are at odds.

In the US, the top 10% of the population own 87% of stocks and 84% of private businesses, according to data from the Federal Reserve. On the other hand, we have previously written about the rise of economic precarity in The Road to Serfdom. So, whilst it is a new observation amongst the commentariat, the diverging fortunes of capital and labour should start to trouble policymakers.

To start with, central bankers are in a difficult position as cutting rates will ultimately make wealth inequality greater, and many monetary economists would argue that inequality is not an objective in the Fed’s mandate. This is a fiscal/political problem, and one that Donald Trump had vowed to fix. However, the kinds of necessary fiscal remedies would have a strong ‘Robinhood’ flavour to them (fewer asset or capital exemptions, higher capital gains tax, and potentially higher corporate taxes) in truth are unlikely to be implemented.

The White House might argue that at least the US isn’t Europe – where everyone is poor, as all the wealthy have fled. Listening to debates in the UK House of Commons or France’s parliamentary fiscal committees last week, I have some sympathy for this view. Europe’s economies look ‘pear-shaped’ as the English might say.

Still, the idea of the K-shaped, or Marxist economy is worth studying, not so much for its economic consequences, but for the political, and ultimately financial, change it may bring.