Back in July, I wrote an article titled "Bank of America warns America now has 2 economies." At the time, the bank's analysts saw an increasingly uncomfortable split beneath what has otherwise been a resilient U.S. economy. BofA used the popular term "K-shaped recovery" to describe the setup, or "reflation for higher-income households, stagflation for lower-income households." Put simply, the wealthier households continue benefiting from robust balance sheets, elevated asset values and a strong stock market. At the same time, lower-income Americans are squeezed by sticky prices, higher borrowing costs and energy pressure.
Essentially, two groups living in the same economy move in opposite directions. One arm rises while the other is under duress. Moreover, that gap was striking.
At one point, BofA's internal data showed spending by the top 1% up 9%, versus 5.5% for lower-income households. Fast forward just a month though, and something unexpected happened. Bank of America's newest consumer data shows what it calls a "great convergence", particularly where it matters most for household spending.
I attended BofA's webinar featuring Aditya Bhave, head of U.S. economics for BofA Global Research, and David Tinsley, senior economist at Bank of America Institute, on the state of the U.S. consumer, the K-shaped economy, and what comes next. Bank of America revamps AMD stock price target for 2026 Morgan Stanley resets Microsoft stock forecast ahead of earnings Goldman Sachs revamps SpaceX stock price target for 2026 My biggest takeaway from the meeting was that something big has changed inside America's two-speed economy. For nearly the previous 12 to 18 months, the bank's internal data underscored a familiar K-shape, where high-income households spent about 1 to 2 percentage points quicker than middle- and lower-income consumers month after month.
Spending growth across lower-, middle-, and higher-income households has moved at the same rate, with discretionary spending converging near 5% year over year. As Tinsley put it, "There has been a closing of the K in this data, be in no doubt." Importantly, according to BofA that convergence is also visible on discretionary categories, making the shift a lot more meaningful. However, this doesn't mean America's K-shaped economy disappeared.
The top 5% remain an exception, with spending growth still running at nearly 1.5 percentage points faster than the rest, backed by tremendous stock-market wealth effects. That leaves out a far more complicated picture with cash-flow behavior converging while the underlying wealth divide remains intact. Bhave captured that uncertainty by saying that "The K is converging for now, but I wouldn't be completely shocked if it starts to open out again." Perhaps the most consequential shift in Bank of America's data is actually linked to income.
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