The U.S. economy is currently experiencing a divergence, thriving for some while straining others, illustrating a K-shaped recovery.

This economic pattern means that one segment of the population is on an upward trajectory, while another is facing decline. For those on the ascending path, the situation is promising. With the top 10% of households in the U.S. now responsible for almost half of all consumer spending, they benefit from the booming stock market. Furthermore, hourly wages are increasing most rapidly among high earners, marking a shift from the pandemic trend where lower-paid workers saw the greatest wage growth, as reported by the Federal Reserve Bank of Atlanta.

Conversely, those on the descending path are encountering mounting challenges. The cost of groceries has surged at the fastest pace in nearly three years, reflecting record highs in prices for items like beef and coffee. Additionally, the job market is showing signs of slowing, and there is a growing number of subprime borrowers who are struggling to keep up with their car loan payments.

Meanwhile, those on the lower arm are feeling the squeeze. Grocery prices recently posted their fastest monthly increase in nearly three years, the job market is cooling, and more subprime borrowers are falling behind on their car loans.

“There are now two Americas: A few small pockets of the invulnerable amid a swelling sea of desperation,” Peter Atwater, an expert in behavioral economics who popularized the K-shape idea, wrote last month.

Industries have split, too. AI investment is booming, big banks are posting strong profits, and perk-laden premium credit cards are thriving — American Express now charges $895 a year for its Platinum card.

Companies that sell to both branches have noticed the divide. McDonald’s CEO Chris Kempczinski recently warned of a “two-tier economy” with middle and lower-income consumers under “a lot of pressure.”

“Even toothpaste sales are a little weak — people are squeezing more out of the tube,” Tony DeSpirito, BlackRock’s global chief investment officer of fundamental equities, told Bloomberg this week.

Where is the split showing up?

Talk of a “K-shaped” recovery took off during the pandemic, when high-income households and select industries rebounded far more quickly than others.

In 2021, Labor Department researchers concluded that the lowest wage workers had the steepest decline in employment and experienced the slowest subsequent recovery.

“Increased inequality due to the pandemic may be an issue for years to come,” the report warned.

Since then, the divergence has started to show up in both subtle and unmistakable ways.

The car market

The average price paid for a new car recently passed the $50,000 mark for the first time, a record fueled by luxury buyers.

“Today’s auto market is being driven by wealthier households who have access to capital, good loan rates and are propping up the higher end of the market,” Cox Automotive executive analyst Erin Keating said in a statement.

Affordable new cars have all but vanished.

“The $20,000-vehicle is now mostly extinct, and many price-conscious buyers are sidelined or cruising in the used vehicle market,” Keating said.

The share of trade-ins with negative equity has climbed to nearly 30% and underwater borrowers owe an average of $6,905 more than their vehicles are worth, according to Edmunds.

A sign of further distress: the share of subprime auto loans that are 60 days or more overdue on their payments hit a record of more than 6% this year, Fitch Ratings data shows.

Airfare and hospitality

The divide is visible in travel as well.

Delta and United Airlines have pulled ahead by focusing on premium offerings in an industry known for notoriously thin margins.

“The premium products used to be loss leaders, and now they’re the highest margin products,” Delta President Glen Hauenstein said on a recent earnings call.

Meanwhile, budget carriers like Spirit, Frontier and JetBlue have all struggled to turn a profit as more cost-conscious flyers pull back.

Hilton has also found success at the higher end of the market, with CEO Chris Nassetta noting on the company’s earnings call that its luxury business has been performing “really well.”

What could it mean for the overall economy?

An increasingly K-shaped economy isn’t a crisis on its own, but it carries risks, with fewer households and sectors powering growth.

If spending at the top slows or stock market confidence falters, momentum could fade quickly.

“As long as they keep spending, the economy should avoid recession, but if they turn more cautious, for whatever reason, the economy has a big problem,” Moody’s Analytics chief economist Mark Zandi wrote in September.

Concerns about an “AI bubble” have also heightened anxiety about an unbalanced economy, drawing comparisons to the late-1990s dot-com boom.

“There really do seem to be two economies right now — a booming AI economy and a lackluster everything-else economy,” journalist and author Derek Thompson wrote in a recent essay.

Harvard economist Jason Furman estimates that more than 90% of demand growth in the U.S. economy during the first half of the year came from just two GDP categories — information processing equipment and software.

Whether those investments in AI pay off remains to be seen, but for now, America’s expansion appears to be relying on a narrower base than before.