The US economy exits 2025 with one phrase defining consumers — K-shaped.
This year, the division between the economic haves and have nots widened, with sentiment souring as those in the middle of the income distribution were pressured by a softening labor market and feared inflation resulting from tariffs.
As of November, the unemployment rate stood at a four-year high of 4.6%. The University of Michigan’s final consumer sentiment reading of the year found that nearly two-thirds of respondents expect unemployment to rise in the year ahead.
“Despite some signs of improvement to close out the year, sentiment remains nearly 30% below December 2024, as pocketbook issues continue to dominate consumer views of the economy,” said Joanne Hsu, director for the University of Michigan survey of consumers.
A report from the Bank of America Institute published on Dec. 22 showed spending from consumers in the top third of the income distribution rose 4% over the prior year in November, the fastest level of growth in four years. Spending from households in the lowest third of the income distribution is up less than 1% over the same period.
And the divide in sentiment and spending comes back to the stock market, which is set to close the year near record highs and record a third straight year of double-digit gains.
“Not only is [the K-shaped economy] higher income versus lower income, but it’s also age-based and asset-based,” said Will Auchincloss, Americas retail sector lead at EY Parthenon.
“So, if you’re generally older and have a lot of assets, particularly in the stock market, then you’re feeling pretty good about life. If you’re not in that bucket, you’re not feeling as optimistic.”
Over the course of the year, earnings reports from some of America’s biggest retailers showed how the K-shaped economy was creating winners and losers.
Retailers that are leaning into value and low prices reported strong results and were rewarded by investors, with shares of Walmart (WMT) and off-price chain TJX (TJX) both outperforming the S&P 500.
“Everybody’s looking for ways to save money and to be more frugal,” said Joe Feldman, an analyst with Telsey Advisory.
“The middle and lower part [of the income distribution] is still under a lot of pressure, very much focused on basics and essentials for daily needs,” Feldman added.
Walmart referred to US consumers as being “choiceful” in multiple earnings reports this year. And dollar store chains reported an influx of higher-income shoppers this year as economic uncertainty pushed more households to look for ways to save.
“We’re pleased to see growth once again in our total customer count, with disproportionate growth coming from higher-income households,” Dollar General (DG) CEO Todd Vasos told investors on the company’s latest earnings call.
Dollar Tree (DLTR) said it gained 3 million new shoppers across all income brackets in the quarter. Roughly 60% of its new shoppers are from high-income households, which the company defined as earning over $100,000.
The year ahead could further put this K-shaped trend to the test, with Feldman noting that “we have not seen the worst of the tariffs yet,” which could potentially raise prices on a wider array of goods in 2026.
Some analysts have also told Yahoo Finance that retailers may be waiting until the first quarter to pass along higher prices in an effort to keep holiday shopping robust. The National Retail Federation said Americans would likely spend $1 trillion at the holidays this year for the first time.
As for how long a K-shaped economy can persist, Bank of America suggests this dynamic doesn’t yet put overall economic growth at risk just yet.
“From a macroeconomic perspective, higher- and middle-income households’ consumer spending accounts for the bulk of overall US consumption, so the economy can continue to grow as a ‘K’ for some time,” the firm wrote.
On Dec. 23, the US government reported GDP growth rose at a 4.3% annual rate in the third quarter of the year. A key driver? Consumer spending, with final sales to domestic purchasers rising 3% during the quarter.
Michael Pearce, chief US economist at Oxford Economics, said this rise shows “continued strong gains in consumer spending, particularly on services. Most of that is driven by recent wealth gains, with real disposable incomes essentially flat on the quarter.”
He added, “The K-shaped consumer is alive and well.”
Brooke DiPalma is a reporter for Yahoo Finance. Follow her on X at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.