The letters K, C, and E are not initials or fraternity symbols — they are the terms economists, executives, and politicians now use to describe the U.S. economy.
Since the pandemic recovery, economists largely agreed the economy was “K-shaped,” meaning different income groups were moving in opposite directions with growing inequality between them.
That consensus is now fracturing, with competing letter-shaped frameworks gaining traction across academic circles, Wall Street trading floors, 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 proliferation of these competing economic labels.
Letter shapes have long been used to describe economies following major downturns, with “V-,” “L-,” and “W-shaped” recoveries among the most well-known historical examples.
Don Rissmiller, chief economist at research firm Baird Strategas, noted it is unusual for this kind of letter-based framing to maintain staying power among everyday Americans several years after a recession.
“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 waves earlier this month when he declared the K-shaped economy was finished, arguing a C-shaped economy was forming as lower-income consumers gain ground.
Bessent pointed to wage gains among lower earners and policies including President Donald Trump’s “no tax on tips” and “no tax on overtime” as evidence the bottom class is improving its 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 (HLT) CEO Christopher Nassetta told analysts the hotel company is “definitely seeing” a C-shaped 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 (JPM) former chief economist, said the U.S. conflict with Iran complicates this emerging view, as lower-income consumers spend more of their budgets on energy and face greater exposure to rising gas prices.
“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 remains near record lows, according to the University of Michigan survey, with low- and middle-income respondents taking a particularly hard hit this month.
Joanne Hsu, director of the University of Michigan survey, confirmed that confidence among lower- and middle-income respondents suffered an outsized decline in the most recent reading.
Shane Grant, Colgate-Palmolive’s (CL) operations chief for the Americas, said at a Deutsche Bank consumer conference in June that “the dynamic of a K-shaped economy we see is alive and well in the United States.”
Combined credit card balances hit a near-record $1.26 trillion in the second quarter, with New York Fed researchers saying this is evidence “there are a lot of households that live paycheck to paycheck.”
The Bank of America Institute noted that while higher earners had been outspending lower earners on credit cards, the gap across income classes began narrowing in May of this year.
“What was once a ‘K’-shaped consumer is increasingly becoming one of convergence,” wrote David Michael Tinsley, the institute’s senior economist, in a note to clients.
Some analysts now argue the economy has evolved into an E-shape, describing three distinct income classes on separate but parallel tracks that are neither converging nor diverging further.
Heather Long, chief economist at Navy Federal Credit Union, said the E-shaped framework may better capture a middle class “just hanging on,” adding that any convergence argument requires “some real mental gymnastics.”
Scott Thompson, CEO of Somnigroup International, the maker of Tempur-Pedic mattresses, admitted he had not yet encountered the E-shaped framework when asked about it on the company’s recent earnings call.
“That’s a new one for me,” Thompson said. “I was ready for K; hadn’t thought about E.”
