{"id":63155,"date":"2026-05-04T16:31:25","date_gmt":"2026-05-04T06:31:25","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=63155"},"modified":"2026-05-04T16:31:25","modified_gmt":"2026-05-04T06:31:25","slug":"us-economy-on-an-unstable-knife-edge-at-present","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=63155","title":{"rendered":"US economy on an unstable knife edge at present"},"content":{"rendered":"

The income and wealth inequality that continues to grow in most advanced nations has led to some new terminology being introduced into the lexicon of economic terms, the – K-shaped economy: When growth moves in two different directions<\/a>. When this pattern of growth is identified you know how far out of kilter the world has become. Essentially, for most people, times are so tough that even essential goods and services become so expensive that even non-discretionary spending starts to take a hit. Yet, for the top-end-of-town, with the high wealth and high incomes, who are boosted by rising central bank interest rates and rising asset prices (financial and real estate etc), their spending goes crazy as the Porsches roll out the showroom door at an increasing rate. The K-pattern relates to the less well-off heading south and the rich and high income cohorts heading north in terms of prosperity and capacity to consume. The latest data from the US, which exemplifies this trend more than most countries, given its massive inequality, clearly demonstrates this phenomenon.
\n<\/p>\n

Latest US National Accounts data – March-quarter 2026<\/h2>\n

Last Thursday (April 30, 2026), the US Bureau of Economic Analysis released the – GDP (Advance Estimate), 1st Quarter 2026<\/a> – which reported that growth in the US was running at 2 per cent per annum, up from 0.5 per cent in the December-quarter 2025.<\/p>\n

The BEA published this graph to capture the annual GDP growth over the last several quarters:<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

They also published this graph, showing the different contributions made to that growth outcome from the major aggregate spending categories.<\/p>\n

They noted that “The contributors to the increase in real GDP in the first quarter were investment, exports, consumer spending, and government spending. Imports, which are a subtraction in the calculation of GDP, also increased.”<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

The contributions were:<\/p>\n

1. Personal consumption expenditure 1.08 points.<\/p>\n

2. Gross private domestic investment 1.48 points.<\/p>\n

3. Government consumption expenditures and gross investment 0.73 points.<\/p>\n

4. Net exports -1.3 points<\/p>\n

5. Total GDP growth 2 per cent.<\/p>\n

So consumption expenditure accounted for just over 50 per cent of the overall outcome, while domestic investment was nearly 75 per cent of the total growth.<\/p>\n

Net exports were a drain on growth, and that tells you that Trumps’s hoped for transformation of the US into an export machine is not working.<\/p>\n

However, on the face of it, those figures tell us nothing much about the presence of a K-shaped economy.<\/p>\n

They tell us that personal consumption expenditure remains strong despite the rising costs and very modest growth in real wages.<\/p>\n

They tell us that domestic investment is booming.<\/p>\n

If we dig a little deeper into the spending aggregates, the picture becomes a little clearer.<\/p>\n

The first graph shows the contributions to real GDP growth in the March-quarter from the consumption spending components.<\/p>\n

The red bars are the aggregate and main sub-aggregate totals (Goods and Services).<\/p>\n

I sorted within those sub-totals from strongest contributor to weakest.<\/p>\n

For goods (overall negative contributor) it is expenditure on Motor Vehicles that dominate.<\/p>\n

For services, Health care and FIRE dominate while food and accommodation were negative contributors.<\/p>\n

\"\"<\/a> <\/p>\n

<\/div>\n

Some further digging found that – New cars are increasingly becoming a luxury amid K-shaped economy concerns<\/a>.<\/p>\n

In fact:<\/p>\n

\nThe share of new-car buyers with incomes of less than $100,000 has dropped from 50% in 2020 to 37% last year, while the share of buyers with incomes of more than $200,000 has grown from 18% to 29% during that time frame …\n<\/p><\/blockquote>\n

Porsches going out of showrooms!<\/p>\n

The Boston Consulting Group released a report on December 12, 2025 – Automotive Industry Beyond the Drive: The Future of the Luxury Automotive Ecosystem<\/a> – forecast that “the US total addressable market for vehicles priced at or above $100,000 is projected to rise by a compound annual growth rate of 5% to 7% through 2035”.<\/p>\n

And “a large proportion of buyers across all age groups favored a couple of anchor brands (notably Porsche and Ferrari) …”<\/p>\n

In terms of investment expenditure growth, the strongest contributors are equipment, specifically, Computers and peripheral equipment (0.58 points) and Information processing equipment (0.83 points), and in intellectual property products, software (0.51 points).<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

What does that all mean?<\/p>\n

The personal consumption pattern is being dominated by strong expenditure by high-income households, which have reaped large income boosts as a result of rising interest rates and the share market growth.<\/p>\n

Meanwhile, the investment boom is being driven by massive investment by the large technology corporations in AI.<\/p>\n

How that all turns out is anyone’s guess, but I predict that we are approaching a specific form of Marxian realisation crisis where AI undermines mainstream employment, particularly among the graduate positions (for example, computer coding, systems analysis, accounting, etc) and makes firms more capable of pumping out goods and services.<\/p>\n

The question that is staring us. in the face is who is going to buy the stuff when unemployment rises and income growth gets concentrated to the top-end of the distribution.<\/p>\n

There are only so many luxury cars that one can buy.<\/p>\n

Latest K-economy research<\/h2>\n

What appears to be happening in the US at the moment is the technology companies are spending as if there is no tomorrow and their wealth owners are buying a lot of consumption items with the largesse that the AI boom is providing via the share market.<\/p>\n

This is where Capitalism has reached.<\/p>\n

And it is highly unstable.<\/p>\n

The latest research from the New York Federal Reserve Bank (published May 1, 2026) –
\nExplaining the K\u2011Shaped Economy: What\u2019s Behind the Divide? <\/a> – considers the latest National Accounts data:<\/p>\n

\n… is consistent with the popular press\u2019s idea of a \u201cK-shaped economy\u201d in which higher-income households experience faster growth in spending than lower-income households.\n<\/p><\/blockquote>\n

The overall finding is that:<\/p>\n

\nWe find that, since 2023, wealth has increased the most for high-income households, while inflation has risen the most for low-income households, with both factors helping explain the fact that real retail spending rose the most for high-income households. In contrast, earnings display a more mixed pattern, though earnings of the highest earners have grown more rapidly than earnings of the lowest earners.\n<\/p><\/blockquote>\n

Their analysis of spending patterns finds that:<\/p>\n

1. “real spending on luxuries increased cumulatively since 2023 for all three income groups and spending on necessities declined for most groups.”<\/p>\n

2. Notably, the growth in retail spending has been driven by the growth in luxury spending.”<\/p>\n

3. “We also see that growth of both necessity and luxury spending by income group displayed the same K\u2011shaped pattern as seen in total retail spending.”<\/p>\n

Why has a divergence in consumption expenditure across the income groups occurred?<\/p>\n

The New York Federal Reserve Bank researchers find that;<\/p>\n

1. “… although the lowest wage quartile has experienced the lowest wage growth in the past year, we see that this has not always been the case. In fact, in some periods of 2023 and 2024, this group experienced the highest growth out of all the quartiles. Given that the K-shaped spending growth appeared in late 2023 and has persisted since, we suggest that there are other factors besides wages that may explain the K-shaped spending pattern starting in late 2023.”<\/p>\n

2. Were there differential inflation impacts across the income groups? The research suggests that “beginning in late 2022, low-income households consistently faced higher inflation than middle- and high-income households did.”<\/p>\n

The higher inflation impact at the bottom of the income distribution has been “restraining their spending” whereas at the top, the impact of inflation is “below or near the national average”.<\/p>\n

Shifts in the wealth distribution have also been important.<\/p>\n

The researchers found that:<\/p>\n

\n… there have also been K-shaped growth patterns in household wealth … since 2023, with higher income groups experiencing higher cumulative wealth growth, relative to the first quarter of 2023, than lower income groups in nearly every quarter …
\nThus, real net worth of the top percentile grew by more than 25 percent, while that of the middle 40 percent grew by less than 10 percent. This growth in net worth has been driven by large increases in financial assets for higher-income groups and especially the top percentile … Given these wealth patterns, it is not surprising that higher income groups also increased their retail spending by more than lower income groups.\n<\/p><\/blockquote>\n

The overall conclusion is that K-shaped patterns across wages growth, impact of inflation, and wealth shifts have emerged in the US since 2023 and are influencing the composition and extent of GDP growth.<\/p>\n

Implications<\/h2>\n

First, like all speculative and massive investment booms, this one has the potential to go bust as some AI corporations find they cannot realise the investments.<\/p>\n

It is a frenzy at present but a shakeout is coming and where that lands is difficult to guess – other than nowhere good.<\/p>\n

Second, the folly by Trump and the Israelis seems to be ongoing and will further strain energy markets.<\/p>\n

I will write about what this means for central banks in another blog post, but the policy making space has become so ideologically concentrated that governments think that interest rate adjustments (upwards) are the only way to deal with the inflationary pressures.<\/p>\n

Trying to deal with a supply shock with interest rate increases will dramatically fail (again) and will only drive the K-shaped pattern further until the top of the K can no longer offset the bottom arm and the result will be recession.<\/p>\n

Implications<\/h2>\n

First, like all speculative and massive investment booms, this one has the potential to go bust as some AI corporations find they cannot realise the investments.<\/p>\n

It is a frenzy at present but a shakeout is coming and where that lands is difficult to guess – other than nowhere good.<\/p>\n

Second, the folly by Trump and the Israelis seems to be ongoing and will further strain energy markets.<\/p>\n

I will write about what this means for central banks in another blog post, but the policy making space has become so ideologically concentrated that governments think that interest rate adjustments (upwards) are the only way to deal with the inflationary pressures.<\/p>\n

Trying to deal with a supply shock with interest rate increases will dramatically fail (again) and will only drive the K-shaped pattern further until the top of the K can no longer offset the bottom arm and the result will be recession.<\/p>\n

Higher inflation (and interest rates) will also make it harder for the AI investments to deliver desired returns, which will then reverse the share market gains to some extent.<\/p>\n

So the inflationary pressures will continue to dampen consumer expenditure at the bottom of the income distribution, but the wealth shifts from inflation may eventually also impact negatively on the consumption xexpenditure at the top.<\/p>\n

And it is the latter that is driving GDP growth in the US.<\/p>\n

Conclusion<\/h2>\n

The system cannot produce stable growth under these circumstances.<\/p>\n

And the long-term prospects are unsound.<\/p>\n

Hopefully, it blows before November and the Republicans are damaged as a result.<\/p>\n

That is enough for today!<\/p>\n

(c) Copyright 2026 William Mitchell. All Rights Reserved. <\/p>\n","protected":false},"excerpt":{"rendered":"

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