As 2025 draws to a close, one phrase increasingly defines the American economic landscape: K-shaped. The term, which describes an economy where different groups experience divergent outcomes—some rising while others fall—has become the defining characteristic of an expansion that has left many households behind even as aggregate numbers remain strong.

The Holiday Spending Paradox

On the surface, the numbers tell a positive story. Holiday retail spending rose 4.2% year-over-year according to Visa data, with the National Retail Federation projecting Americans spent $1 trillion during the holiday season for the first time ever. E-commerce led the way, with online sales climbing 7.8% compared to last year.

But beneath these headline figures lies a more complicated reality. Consumer sentiment has deteriorated throughout 2025, with Americans feeling more pessimistic about the economy at year's end than they did at the beginning. The apparent contradiction—strong spending despite weak confidence—reveals the K-shaped nature of the current expansion.

"The consumer is resilient, but the consumer is cautious. Americans are feeling down about the economy, but Americans are still buying. Economic unease, tighter budgets, and modest splurges define the 2025 holiday season."

— Consumer spending analysis

The Have and Have-Not Divide

Federal Reserve Governor Christopher Waller recently offered a candid assessment of the divide at the Yale CEO Summit:

"When I've talked to retailers and CEOs who cater to the top third of the income distribution, everything's great... it's the lower half of the income distribution that is staring at this going, 'What happened?'"

— Fed Governor Christopher Waller

The divergence is stark. Upper-income households have benefited from asset price appreciation—stocks up 17%+, home values at record highs—while continuing to spend freely on travel, dining, and discretionary purchases. Meanwhile, lower-income households face a different reality: wages that haven't kept pace with cumulative inflation, rising housing costs, and a labor market that is showing signs of softening.

Labor Market Pressures

The unemployment rate has crept up to 4.6% as of November—a four-year high that, while still low by historical standards, represents a meaningful deterioration from the 3.4% lows seen in early 2023. For workers in certain sectors, particularly technology and manufacturing, the job market has become notably more challenging.

This softening has disproportionately affected middle and lower-income workers, who have less savings to cushion periods of unemployment and fewer options to negotiate salary increases. The result is growing financial stress even as the economy continues to expand.

The Inflation Overhang

Perhaps no factor weighs more heavily on consumer psychology than cumulative inflation. While the rate of price increases has moderated significantly from 2022 peaks, prices themselves have not fallen. Groceries, insurance, and housing costs remain 20-30% higher than pre-pandemic levels in many categories.

A recent survey found that 73% of respondents expect higher grocery prices next month—up 16 percentage points since the start of the year. This persistent inflation anxiety is driving a shift in spending patterns, with consumers prioritizing nondiscretionary categories like housing, groceries, healthcare, and transportation while pulling back on discretionary purchases.

What This Means for 2026

The K-shaped dynamic creates challenges for both policymakers and investors:

  • Monetary policy dilemma: The Fed must balance supporting struggling households against the risk of reigniting inflation among those still spending freely.
  • Fiscal uncertainty: Government policy choices on taxes, tariffs, and social programs could either narrow or widen the divide.
  • Consumer company exposure: Businesses catering to upper-income consumers may continue to thrive, while those serving mass-market consumers face more challenging conditions.

Investment Implications

For investors, the K-shaped economy suggests several portfolio considerations:

  • Quality matters: Companies with pricing power and high-income customer bases are better positioned to maintain margins.
  • Discretionary vs. staples: The split in consumer fortunes argues for a barbell approach, with exposure to both luxury goods and essential products.
  • Geographic variation: Some regions are experiencing the divide more acutely than others, affecting local real estate and retail conditions.

Looking Forward

Consumer spending has powered the U.S. economy throughout 2025, accounting for roughly 70% of GDP. The sustainability of that spending—and the health of the expansion itself—will depend on whether the K-shaped divergence narrows or widens in 2026.

For many American households, the question isn't whether the economy is strong—by many measures, it is. The question is whether that strength is reaching them. Until it does, the gap between economic headlines and lived experience will continue to define the national mood.