Where does the K-shaped economy stand in 2026?

It’s got to be every economist’s favorite dinner table debate: Is our economy K-shaped? U-shaped? E-shaped? A squiggly line? Two kids under a trench coat this whole time?

While the notion of a K-shaped economy—an environment in which top-earning households freely spend, while lower-income households pull back—came into the spotlight in 2020, it was 2025 that likely brought the term across many CFOs’ desks.

That was when we kept hearing about the “bifurcated consumer” in earnings calls, a polite way of saying some people were flush with cash and others decidedly weren’t. Many companies quickly adapted, with mainstays like McDonald’s reviving value options in late 2025.

And that’s one of the most interesting aspects of the ongoing K-shaped debate, at least in the eyes of Heather Long, chief economist at the Navy Federal Credit Union. “Economists are still debating this K-shaped concept, but CEOs are not,” she told us. “CEOs adopted it right away in the fall of last year.”

Now, though, we’re in a slightly different moment: Some luxury companies are showing cracks as a result of the war in Iran, potentially softening a would-be bright spot for spending, while problems still persist for lower-income consumers. For CFOs, devising an appropriate approach requires understanding just what kind of economy we’re in right now—and the answer might still read like a passive aggressive text: K.

X plus Y equals K. You work in finance. You love a good ol’ math formula. Here’s one that has a couple of answers: X plus Y equals…K-shaped?

There’s room for debate. David Tinsley, senior economist at the Bank of America Institute, thinks “the biggest driver” of the K-shaped dynamic has traditionally come down to wage growth.

“From the spring of 2025 and onward, lower-income households experienced declining wage growth, softening wage growth, while higher income households experienced accelerating wage growth,” he explained. “That has underlined what’s going on on the spending side as well. We’ve seen a very close replication in terms of spending.”

There were plenty of “ancillary” factors, he added, “like the resumption of payments on student loans, [and] the fact that interest rates haven’t fallen as much as people were at one point expecting.”

Accounting for it. Long sees things relatively similarly. She points to two factors as the “most relevant” to the K-shaped dynamic in both 2025 and 2026: “money in bank accounts, particularly checking accounts, and consumer spending.”

On the bank account side, she notes “people were flush with cash across the income spectrum in 2022, 2023.” That dynamic “starts to change a little bit in 2024,” such that “by 2025, you’ve got the top 20% doing great, and the bottom 80% is treading water,” she said.

She added that when “the money’s not there in the bank account, surprise, surprise, you look at the spending data, and they’re not able to spend.”

“In our data, in some cases, particularly for more moderate income [households], there were parts of last year where moderate income people were spending less in inflation-adjusted terms than in 2019, and so you could really see some of that strain coming through,” she said.

And while the specific drivers of that special K can be debated, it’s much harder to ignore that everyone but higher income households has been hurting.

“You have to look at it through the eyes of the consumer, through the eyes of the household,” Long said. “If you’re sort of looking at it macro, the big picture, percent of income, you are totally dismissing the lived experience on the ground…People are kind of missing that where people are spending their dollars and how they’re spending their dollars have changed a lot, even if the top line number looks pretty flat or pretty consistent.”

Mini-splurge season. So let’s throw a real number into the equation: Does X plus Y equal K in 2026?

“In the latest data, slightly ironically, the spending gap [between high and low income earners] has narrowed a little bit, but that’s simply because within spending, gas spending has risen most and is of most consequence because [lower-income households] have a higher share of it,” Tinsley said. “Once you strip out gas, you still see in our data a big difference in discretionary—nice to have—spending between lower- and higher-income households.”

Meanwhile, Long notes “the middle class is doing the Costco economy,” looking for “deep value” and discount spending options. “The paycheck-to-paycheck feeling is back. That’s what I try to remind people when they’re like, ‘But the spending data looks fine.’ It does, but where they’re spending has really shifted in the last year.”

Recently, sizable tax refunds have also helped to bolster spending, Tinsley and Long point out. That’ll likely hold for the summer, but come this fall, we could be in different circumstances.

Leaner times? “The question is more about the latter part of the year when that sugar rush from tax refunds rolls off, and then you’re going to be back to wages as the primary driver of spending,” Tinsley said. “The reasonable assumption would be that the K-shape could last the whole of this year.”

For now, Long says “we’re in the mini splurge season,” but because consumers likely won’t be as flush with cash later in the year—she also notes tax refund cash will dry up and expects soft wage growth to slow spending—“it’s very possible that more of a K-shape could emerge by the end of the year, and heading into 2027, because of the belt-tightening.”

In the meantime (and even moving into the fall), she thinks companies that “can figure out the mini splurge are going to be the winners.”

While companies that focused on catering to the top part of the famous K will likely stay the course, there’s now revived competition for “the $100,000 customer,” Long said, noting that $100,000 is the median family income.

“In a weird way, when people get back into this belt tightening mentality, what are the easiest things to cut? It’s travel and eating out,” she said. “If you don’t do your summer travel or your holiday travel, you can save hundreds, if not thousands, of dollars, but then people want to still do something for themselves, and so that’s where buying the $50 or $100 item, the Costco economy, is likely what will happen.”