Wage gains may be improving, but slowing jobs and weaker spending tell a more complicated story.
In my sports-crazed house, it was noted with some interest that the Los Angeles Lakers were sold for a record $12.5 billion to Josh Kushner and former Disney CEO Bob Iger, marking the highest price ever paid for a U.S. sports franchise. Mark Walter, who also owns the Los Angeles Dodgers among other sports businesses, is said to have paid $10 billion for the franchise less than a year ago, making an impressive profit. Those profits may come in useful to address findings of current federal and SEC investigations around financial activities tied to Walter’s companies.
With that context in mind, I was struck by Treasury Secretary Scott Bessent’s recent declaration that the “K-shaped economy is over.” Recall that a K-shaped economy was a term used heavily by economists after the pandemic to describe an economy where higher-income households continue to prosper while lower- and middle-income households fall behind. Bessent argued that the divide is closing and that we are becoming more of a “C-shaped economy,” where lower-income workers are gaining ground. On that point, he cites the most recent Bureau of Labor Statistics report, which showed wage growth for lower-wage workers rose by 5.55% year-over-year while high-wage workers reported only 1.5% year-over-year growth. In addition, Bessent cited the “Working Families Tax Cuts” provisions enacted in 2025 such as deductions for tips, overtime and certain senior income.
But, with a capital “B,” there is also the painful reality that job growth is decelerating. The July employment report that showed payrolls declined by -23,000 for the month and prior months were revised lower by -103,000. Income gains are less meaningful if job creation is stagnating. There is also the reality that years of elevated inflation have meaningfully eroded the benefits of wage growth. Meanwhile, the recent surge in energy prices has offset much of the relief some households may have received from tax refunds.
This was evidenced in the release of the July retail sales report, which showed a contraction of -0.6%, the first decline in nine months and the largest monthly drop in more than a year. Even more troubling, core retail sales, a measure closely watched by economists as it ties directly into GDP calculations, fell -0.4% when economists had expected a gain. The weakness was widespread across online retailers, automobile spending, electronics and gas station spending. This report and other economic data from the start of the third quarter suggest consumers are price-sensitive and cautious rather than resilient and expansionary.
So are we in a K-shaped economy or a C-shaped economy? The answer may matter less than policymakers think. Faster wage growth for lower-income households is just one data point, and it is a positive one we will all take. However, it is too much of a stretch for this economist to say the economy is accelerating from the bottom up. Higher-income households remain responsible for a disproportionate share of overall consumption: according to Moody’s Analytics, the top 20% of households account for nearly 60% of all consumer spending and have continued to increase expenditures at a much faster pace than the bottom 80%. Spending by the bottom 80% was essentially flat after adjusting for inflation. And the wealth divide remains substantial, as higher-income households own a disproportionately larger share of financial assets, retirement accounts and home equity.
Perhaps the bigger story goes beyond the shape of the economy, but rather that the economy is losing momentum. Not a recession, but a softening of an already slow pace of growth, as evidenced by the recent 1.5% annualized print on U.S. GDP. Fading momentum is a worry not only for the economy but for stocks too, trading at peak valuations, which means as we head into the August doldrums, we must all stay vigilant for momentum shifts. Let’s not get distracted by alphabet soup framing as the shape of your returns will come from a solid financial plan and investment implementation taking all these factors into account.
Written by a human.