The “K-shaped economy” became shorthand for a two-track world: the top arm of the K climbing while the bottom stalls or slides. We have been living inside that letter for several years now, and most of the recent data has done nothing to challenge it. The last few weeks brought some genuinely soft prints, enough to have people whispering about a labor market cooling and possibly even a looming recession. So it would be easy to file this week away as more of the same.
This week’s chart, from the Bank of America Institute, says something else, and it is more hopeful than the headlines.
The chart splits after-tax wage growth into household income terciles. The provocative bit is the crossing: in July, wage growth for lower-income households passed higher-income households for the first time since December 2024. The green line, the top 5%, which spiked near 10% last year and has since decelerated back toward the pack. The blue line, the lower-income cohort, is curling up to meet it. The two arms of the K are bending back toward each other.
BofA sees the same compression in spending, not just wages. Lower-income consumption is growing faster; upper-income spending is slowing. When the wage data and the spending data tell the same story, I start to pay attention.
So is the economy becoming less K-shaped? Maybe. One month is not a trend, and I would not build a thesis on a single crossing. But the more interesting question is not whether it happened. It is why.
Here is the cause I think most folks are not fully appreciating: rent.
For renters, housing is almost always the single largest line in the budget. Roughly a third of American households already spend more than 30% of income on housing and utilities, and for about 16% of us, shelter alone eats more than half of what comes in. When rents are ripping higher, as they have the last several years, that line item crowds out everything else, and it crowds out the bottom of the income distribution first, because those households rent and have the least slack. That is the machinery that builds the lower arm of the K in the first place.
But now it’s flipped. Rent growth has flattened, and flat rents quietly hand money back to exactly the households that were most squeezed. The dollar that is not going to the landlord this month can go to groceries, a car repair, a small indulgence, or the electric bill. That is real wage growth by another name, and it shows up as the bottom of the K finally lifting.
None of this erases the soft labor data, and a cooling job market could widen the gap again. But for one month at least, the gap narrowed. In an economy we keep drawing as a K, that is worth noticing.
Sources: Bank of America Institute, “Has the wage growth ‘K’ closed?” and the July 2026 Institute Employment Report; Axios, “Spending narrows between lower- and higher-income Americans”; housing cost-burden figures from the Joint Center for Housing Studies, The State of the Nation’s Housing 2025.