The first thing you might ask is what is a K-shaped economy?

 

A K-shaped economy describes a situation where different parts of the economy, or different groups of people, recover or perform in sharply diverging ways, forming the two arms of the letter “K.”

 

The upper arm of the K (going up): Higher-income households who own assets like stocks and real estate benefit from low interest rates, rising asset prices, and continued spending power.

 

The lower arm of the K (going down): Lower- and middle-income households are burdened with heavy debt and face job losses, wage stagnation, higher inflation on essentials, and rising delinquencies, causing their financial situation to worsen even as the overall economy does well.

 

In short: the rich get richer (or at least keep thriving), while many others fall further behind. This is exactly what we’re seeing in the U.S. right now.

As you can see from the chart below, the higher income population continues to spend freely. They benefitted most from the stock and housing booms, have little debt relative to assets, and their credit metrics remain pristine. This group is still driving the majority of consumption growth and keeping overall GDP numbers respectable.

 

The lower income population (bottom 60% or so) are under real pressure:

• Credit card delinquencies are now 12.4%, the highest since 2011.
• Subprime auto-loan delinquencies (60+ days past due) hit 6.65%, worse than during the Global Financial Crisis.
• Student loan delinquencies have surged since repayments restarted.

Budgets are being squeezed by slower real wage growth at the bottom, still-elevated inflation for essentials, and higher interest rates on consumer debt. Many lower-income households are dipping into savings or relying on credit cards and buy-now-pay-later services just to maintain spending.

 

Source: Federal Reserve Bank of New York Consumer Credit Panel / Equifax. Data retrieved Nov 21, 2025

 

What does this mean for markets?

Aggregate numbers can be misleading. Headline consumer spending and GDP may look okay only because the top keeps spending; the bottom is rolling over.

 

Credit-sensitive sectors are potentially at risk – banks, consumer finance, auto lenders, and discretionary retailers that serve middle/lower-income customers.

 

Resilient areas remain attractive – anything tied to the affluent consumer (luxury, travel, high-end services, technology) and companies with strong balance sheets or pricing power.

 

The Fed is watching this split closely. A weakening lower-income cohort may raise the odds of rate cuts in 2026 if unemployment starts to tick higher.

I've also included a piece from our CIBC Economics team entitled "Tariffs: Not a San Francisco Treat".

 

As always, if you have any questions, please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan