Economists, corporate executives, and policymakers are locked in a fierce debate over which letter best captures the current state of the American economy.
For years following the pandemic, a broad consensus described the recovery as “K-shaped,” reflecting two diverging trajectories for different income groups simultaneously moving in opposite directions.
That consensus is now fracturing, with letters like “C” and “E” circulating through academic circles, Wall Street trading rooms, and corporate earnings calls alike.
“This is some of the alphabet soup,” said Joel Mokyr, a Nobel Prize-winning economic historian at Northwestern University, describing the growing confusion over how to characterise today’s conditions.
Letter shapes have been used for decades to summarise economic conditions, particularly following major downturns, with “V-,” “L-,” and “W-shaped” recoveries all featuring prominently in past cycles.
Don Rissmiller, chief economist at research firm Baird Strategas, noted that it is unusual for this kind of shorthand to maintain such staying power several years after a recession has ended.
“During recessions and recoveries, the letters are really popular,” Rissmiller said. “To use a letter in the middle of a business cycle, I guess we could say that’s a little new.”
Treasury Secretary Scott Bessent made headlines earlier this month by declaring the K-shaped economy firmly in the rearview mirror, arguing a C-shaped economy was taking its place as lower-income consumers began gaining ground.
Bessent cited wage gains among lower earners and policy measures including President Donald Trump’s “no tax on tips” and “no tax on overtime” as evidence supporting his position.
“I got sick of hearing about this K-shaped economy,” Bessent told CNBC. “I can say here definitively, the K-shaped economy is over.”
Hilton Worldwide CEO Christopher Nassetta backed the C-shaped view, telling analysts his company is “definitely seeing” such an economy, with middle- and upper-middle segments growing at rates as high as 6%.
“The middle class is getting back in the game,” Nassetta said. “It’s really impossible to deny.”
Anthony Chan, JPMorgan’s former chief economist, pushed back on that optimism, arguing the U.S. conflict with Iran complicates the picture by driving up energy costs that disproportionately affect lower-income households.
“I’m the first to say that we can make some progress,” Chan said. “But nothing of the sort of progress that we can say we can bury the K-shaped economy.”
Consumer sentiment dropped 11% in August from a year ago and remained near record lows, according to the University of Michigan’s closely followed survey, with confidence among low- and middle-income respondents taking a particularly sharp hit.
Several consumer company leaders echoed that caution, with Colgate-Palmolive’s Americas operations chief Shane Grant stating at a Deutsche Bank conference in June that “the dynamic of a K-shaped economy we see is alive and well in the United States.”
Researchers at the New York Fed pointed to combined credit card balances of a near-record $1.26 trillion in the second quarter as evidence that “there are a lot of households that live paycheck to paycheck.”
A third camp argues the economy has evolved into an E-shape, reflecting three distinct income groups that are neither converging nor diverging but instead running on separate, parallel tracks.
“Each group has found a way to live,” said Rissmiller of Baird Strategas, adding that while it may not be the best outcome, it “looks more stable than not.”
Heather Long, chief economist at Navy Federal Credit Union, said the E-shape better captures a middle class that is just hanging on, arguing that the idea of low- and high-earners converging requires “some real mental gymnastics.”
Scott Thompson, CEO of Somnigroup International, maker of Tempur-Pedic mattresses, admitted on a recent earnings call that the E-shaped theory was entirely new to him, saying “I was ready for K; hadn’t thought about E.”