Consumer spending is a critical component of the U.S. economy, accounting for approximately two-thirds of economic growth. Based on retail sales data released earlier this week, this economic engine appears to be running smoothly. August retail sales posted robust growth of 0.6%, while markets had originally expected relatively weak spending for the month.

On the surface, this latest data seems to once again demonstrate the strong "resilience" of American consumers - a narrative that has become commonplace over the past few years: "Despite (insert any economic concern here), American consumers remain in good shape, driving steady economic progress."

However, behind this impressive growth data lies an increasingly severe inequality in American household economic conditions, namely the "K-shaped economy" phenomenon: a small group of high-wealth individuals continue to profit, while broader middle and lower-income families face mounting pressure.

Mark Zandi, chief economist at Moody's Analytics, said: "The economic outlook is closely tied to the wealth and spending of affluent people. The top 20% of income earners are pulling the economic train forward."

Data from Moody's Analytics shows this gap is widening to historic levels. As of June 30, the top 20% of income earners contributed more than 63% of total consumer spending, with the top 10% accounting for more than 49% - both figures represent new highs when looking back at historical data from 1989. In the same period of 2019, these two percentages were 59.2% and 44.6% respectively.

Zandi noted: "For whatever reason, if these high-income groups tighten their spending, the economy will fall into recession." He indicated this scenario could occur if the stock market experiences a significant correction, as much of the wealth supporting affluent consumption is tied to thriving financial markets.

**Hoping for the Best**

Economists indicate that the continued rise in the wealthiest households' share of U.S. consumption growth is both driving up inflationary pressures and fostering speculative behavior that could lead to asset bubbles. This phenomenon not only makes the U.S. more vulnerable to potential recessions in the future but could also leave some Americans struggling for years to come.

Tyler Schipper, associate professor of economics and data analytics at the University of St. Thomas in St. Paul, Minnesota, said: "When we examine different groups in the income distribution, business cycles are always frustrating. Because in every recession, the bottom 10% of income earners get left further and further behind."

The expansion of consumption inequality is occurring against a backdrop of slowing U.S. economic growth, rising inflation, and an increasingly unstable job market.

For people like Calyssa Hall, a Minnesota resident, money is always tight, especially since the pandemic.

Hall said: "It's hard to fully recover, but we still believe good things will happen. I really hope to return to a state of material abundance where I don't worry about money anymore - not spending lavishly, but being able to travel freely without worrying about money."

In August, when Hall and her friend went to the Minnesota State Fair, rising living costs were their primary concern. Previously, they would buy some handicrafts and try various foods, but now they can only cut back to buying just a few food items.

To be fair, prices for most state fair goods have risen significantly over the past year. Professor Schipper and his students at the University of St. Thomas jointly compiled an index called the "On-The-Stick Index" (named because fair foods are often served on sticks), and data shows fair goods prices rose 7.7% year-over-year, more than double the overall inflation rate.

When Schipper tracked prices at this year's Minnesota State Fair, he found that despite exceptionally pleasant weather, attendance was below average. He believes the reason is "lack of consumer confidence, and state fairs are typically occasions where people don't mind spending money." He said one way to avoid paying high prices is to "simply not go to the fair."

**Purchasing Power Continuously Eroded**

Justin Begley, an economist at Moody's Analytics, pointed out that President Donald Trump's broad imposition of high tariffs on U.S. imports has put pressure on consumer demand, business investment, and employment.

However, Moody's Analytics' August "U.S. Household Debt Report" shows that overall, American household debt management remains manageable, with default rates not yet reaching concerning levels.

But when Moody's Analytics analyzed default situations by credit scores (the closest proxy for income levels), they found that credit conditions for middle and lower-income households are becoming unstable.

Although overall default rates hover around pre-pandemic levels, among households with credit scores below 660, the proportion of debt balances overdue by 30 days or more rose to 9.06% in July, the highest level since February 2016.

Additionally, new data released this week by credit scoring company Fair Isaac shows that current credit score declines are occurring at the fastest pace since the Great Recession (2007-2009).

Overall wage growth is slowing, and the pandemic-era trend of faster wage growth for low-income workers has reversed, with high-income groups now experiencing faster wage increases.

New analysis released by Oxfam on Thursday morning shows that the top 0.1% of U.S. income earners are expected to benefit significantly from the latest tax legislation, gaining approximately $60.3 billion. Oxfam estimates that corporate tax provisions in the bill could provide an additional $2 trillion in benefits to the top 1% of income earners.

Schipper noted that meanwhile, middle and lower-income families face particularly severe price pressures.

He said: "Economists have long pointed out that tariffs are regressive (meaning the lower the income, the higher the tax burden as a percentage of income), essentially equivalent to a consumption tax. For families that spend most of their budget on goods and services, consumption taxes create greater pressure. We also find that middle-class families are now shopping at discount stores like Dollar Tree and Walmart."

In Fishers, Indiana, Scott Goodwin's family recently switched supermarkets for their daily necessities.

He said: "I don't like to say this, but we did switch from a local supermarket with a nice environment to another chain supermarket. We had been going to the previous one for five to ten years. My wife felt switching supermarkets could save more money, so we switched."

The Goodwin family has long maintained conservative spending habits - they typically don't travel, instead using money to pay bills, including student loans.

He said: "The economy is always changing, and now is no exception. Is my purchasing power the same as five years ago? Probably not. We're aware of this and will cut spending when necessary."

Recently, they further reduced spending on food and leisure, including canceling all concert plans for this year.

Goodwin was born with polycystic kidney disease, a rare genetic condition that has now progressed to stage five, kidney failure. He said: "Is this because I'm sick, or because of economic conditions? Probably both."

Goodwin is about to start dialysis treatment and urgently hopes to receive a kidney transplant, while facing more medical expenses in the future.

He said: "There are many things waiting for me, and medical costs are one of them."

**Insignificant 25 Basis Point Rate Cut**

Inflation has continued to rise in recent months, partly due to tariff effects and driven by rising service prices, especially in travel-related sectors.

Diane Swonk, chief economist at KPMG, said: "Wealthy families are still willing to pay for 'front row seats' and willing to pay premiums, while many families are cutting non-essential spending. This group of affluent consumers provides support for service sector inflation that was uncommon in the past."

She also noted that widening gaps have led to weakened overall consumption capacity.

"Inequality matters because for every additional dollar middle and lower-income families earn, or receive in their pockets, they have a stronger propensity to consume than high-income families. When inequality worsens, overall consumer spending also weakens. Therefore, this is not just economic divergence, but actually suppresses overall consumption, further exacerbating inequality."

She added: "In some ways, this is simply the worst-case scenario for (the Federal Reserve)."

On Wednesday, the Federal Reserve cut interest rates for the first time this year, reducing the benchmark rate by 25 basis points. Monetary policy effects have lags, and this rate cut is not expected to solve the chronic problem of the K-shaped economy. However, Schipper said it might provide some relief for some families.

He said: "I think for families struggling to pay off credit card debt, every bit of help matters. Over the next six months, some families might consider refinancing their mortgages as a reasonable option, which would be very helpful."

But he also indicated this measure is unlikely to make people breathe a sigh of relief, thinking the worst times are over.

"This just reduces life pressure slightly."