K-Shaped Economy: Slowing Wage Growth and Divergent Consumer Spending

Key Quotes

"If we'll just look at the rearview mirror in terms of Q1 through Q3, this year spending growth on a real basis has been holding up. So, in the first half of this year, about 1.5 percent on average. For the third quarter, given the data that we do now have in hand, we're tracking about 3 percent, quarter-on-quarter, on a real basis. But I think it is important to emphasize that this is already a step down than the numbers that we were seeing last year."

Arunima Sinha highlights that while consumer spending has remained robust, there has been a noticeable slowdown compared to the previous year. Sinha points out that real spending growth in the first three quarters of the year, while positive, has decreased from the higher rates observed in 2024. This indicates a shift in the consumer spending landscape.

"The recurring theme that we've had this year is how are the drivers of consumption going to weigh on different cohorts? And so, how is the labor market going away and how are wealth effects going to play out? And that, sort of, tied in squarely with the narrative that we've been emphasizing this whole year, which is that for the upper income cohorts, those net wealth effects have been very, very supportive. $50 trillion in net wealth that's been created just over the last three years."

Arunima Sinha explains the divergence in consumer behavior based on income level. Sinha notes that significant wealth creation has bolstered spending among upper-income households. This wealth effect, Sinha suggests, has been a primary driver of consumption, contrasting with pressures faced by other income groups.

"So next year, we do think that there could be some broadening out in consumption growth. Just overall we have a sequential step up in growth that begins to take place, starting in the second quarter of [20]26. So, we have consumption growth that starts to slowly inch up from about just under 1 percent in the first quarter of [20]26 -- all the way up to about 2 percent by the end of the year."

Arunima Sinha forecasts a gradual improvement in overall consumption growth for the upcoming year. Sinha anticipates a moderate increase, beginning in the second quarter of 2026 and continuing through the end of the year. This projected rise in growth suggests a potential easing of economic pressures on consumers.

"The overall take is, it's mixed -- to maybe slightly a little worse. I’ll answer it in a few different ways. First, the old-fashioned tire kicking that the retail analysts have done during the holiday season. In our hard line, broad line, food retail space mixed to slightly a little worse. In Alex Straton’s softline world sounded a little bit better. And then if we combine the takeaways that we've had from companies, at least who presented yesterday, Walmart, Target and some other category killer retailers, it sounded about inline. Underlying trend is relatively stable."

Simeon Guttman provides an assessment of the current retail landscape, describing it as mixed with a slight negative leaning. Guttman indicates that while some sectors like softlines show better performance, hardlines, broadlines, and food retail are experiencing weaker trends. Guttman notes that major retailers like Walmart and Target reported stable underlying trends, suggesting a general equilibrium rather than robust growth.

"So one of the ongoing themes across the entire retail landscape has been this big, getting bigger -- we say it a lot -- but the narrowing funnel of market share. So, the inline updates are probably coming from some of the largest companies, even if the overall holiday was a little underwhelming. Now inline is not anything to write home about. It's harder to get to an inline holiday if you started out below. So inline's okay but not gangbusters. That's probably the right way to characterize it."

Simeon Guttman explains a key trend in the retail sector: market share consolidation. Guttman observes that larger companies are continuing to gain dominance, which accounts for stable performance reports even amidst a generally underwhelming holiday season. Guttman characterizes this "inline" performance as acceptable but not exceptional, highlighting the difficulty of achieving even moderate success when starting from a weaker position.

"You talked about the K economy, I think, you know, it was very clear the higher end consumer continues to spend and outperform. Value and innovation continue to be things that consumers are looking for. Online seem to do better than in stores. That's what we heard from a lot of companies coming out of last week. And then newer channels like TikTok Shop are coming into the mix and, and brands are seeing, you know, strong growth from those channels as well."

Megan Clapp identifies distinct consumer behaviors and preferences shaping the market. Clapp emphasizes that high-end consumers remain strong spenders, and that value and innovation are critical purchasing factors. Clapp also notes the growing importance of online channels and emerging platforms like TikTok Shop for brand growth.