The U.S. economy is presenting a puzzle. GDP growth just clocked in at 4.3%—the fastest pace in two years. Stock markets are at record highs. Holiday retail spending is on track to exceed $1 trillion. Yet consumer confidence has fallen to its lowest level since tariffs began in April, with a majority of Americans saying the economy has gotten worse.

The explanation: a "K-shaped" economy where wealthy households are thriving while lower and middle-income families are struggling. Two Americas are emerging, and the divergence has profound implications for investors, policymakers, and the country's future.

What the Data Shows

The economic data tells a tale of two economies:

At the top:

  • High-income households are driving nearly all consumption growth
  • Stock and real estate wealth has lifted the top 20% to record prosperity
  • Luxury spending, travel, and financial services remain robust

At the bottom:

  • 65% of U.S. households say the cost of living has gotten worse in the past year
  • Consumer views of current financial situations "collapsed" into negative territory
  • Credit card delinquencies are rising among lower-income borrowers
  • The unemployment rate has ticked up to 4.6%

The Say-Do Gap

One of the strangest features of 2025's economy is the disconnect between what consumers say and what they do:

Consumer confidence: Has fallen for five consecutive months to 89.1

Consumer spending: Holiday retail sales exceeding $1 trillion, Black Friday online sales hit a record $11.8 billion

This "say-do gap" makes sense when you realize different groups are driving the survey responses versus the spending data.

Why the Divergence

Several factors explain the K-shaped pattern:

Asset prices: Stocks are up 17% in 2025; home prices remain elevated. Wealthier Americans who own these assets feel richer. Those who don't feel left behind.

Inflation's uneven impact: While headline inflation has cooled to 2.7%, essentials like food, housing, and healthcare remain elevated. Lower-income families spend a larger share of their budget on these necessities.

Interest rate sensitivity: High mortgage rates price out first-time homebuyers. Credit card rates above 20% hurt those carrying balances. Cash-rich households are less affected.

Labor market softening: The unemployment rate has risen to 4.6%, with layoffs disproportionately affecting lower-wage workers. The 1.17 million layoffs in 2025—the highest since the pandemic—have primarily hit vulnerable populations.

Policy Implications

The K-shaped economy creates challenges for policymakers:

For the Fed: The strong aggregate growth data argues against rate cuts. But the struggles of lower-income Americans suggest some stimulus might help. The Fed is stuck between these competing signals.

For Congress: Fiscal policy could address the divergence, but the Trump administration has prioritized tax cuts that primarily benefit higher earners.

For candidates: The economic narrative is fractured—great for asset owners, challenging for everyone else.

Investment Implications

The K-shaped economy has clear investment implications:

Luxury vs. discount: High-end brands serving wealthy consumers may outperform discount retailers serving stressed lower-income shoppers.

Financial services: Wealth management and private banking benefit from asset concentration. Consumer lending faces rising delinquencies.

Real estate: Luxury properties may hold value better than entry-level homes affected by affordability constraints.

Consumer discretionary: Company positioning within the sector matters more than the sector itself.

What Could Change

Several developments could narrow the K-shaped divergence:

  • Wage growth exceeding inflation for lower-income workers
  • Falling interest rates improving affordability
  • Stock market correction reducing the wealth effect
  • Fiscal policy targeting struggling households

The Bottom Line

The K-shaped economy explains one of 2025's biggest puzzles: how GDP can grow 4.3% while consumer confidence craters. The answer is that "the economy" isn't experienced uniformly. Wealthy Americans—who own most stocks and real estate—are thriving. Everyone else is struggling with elevated prices, rising rates, and job market uncertainty. Understanding this divergence is essential for investors trying to navigate an economy that's simultaneously booming and struggling.