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.
Krisztian Bocsi/Bloomberg via Getty Images
America’s K-shape has changed shape
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.
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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.
That said, the gap has now narrowed.
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.”
Why the bottom of the K suddenly looks stronger
Perhaps the most consequential shift in Bank of America’s data is actually linked to income.
For the lion’s share of 2025 and early 2026, after-tax wage growth for lower-income households was stuck at 1% to 1.5%.
Over the past two to three months, though, BofA said the rate accelerated toward 5%, roughly aligning or at times exceeding the growth for other income groups.
That essentially switches up the quality of the consumer story.
Lower-income card spending is also growing at 5%, suggesting BofA is seeing something close to a balance between paycheck growth and spending growth.
Importantly, the bank doesn’t see clear evidence that households are financing the elevated spending through savings drawdowns or credit. Interestingly, balances for households earning below $50,000 are only slightly behind and roughly flat year over year, while BofA sees no meaningful inflection in financial stress.
BofA sees two possible explanations for the rise in income.
The first and stronger point pertains to job switching. Lower-income workers have been looking to change jobs more often, and BofA estimates those moves could produce nearly a 10% after-tax pay increase.
On the flipside, the other explanation is less durable.
Some households might have lowered their tax withholding, temporarily raising take-home pay without an improvement in underlying wages.
That distinction is important because if wages are actually strengthening, the bottom of the K is getting stronger. However, if withholding is doing much of the work, this could be more of a temporary cash flow boost.
National data adds another reason to be cautious.
Real average hourly earnings dropped 0.2% year-over-year in July, with payrolls dropping by 23,000 and unemployment holding at 4.1%.
What this means for America’s 2 economies
Perhaps the biggest implication is that America might still have two economies, but the dividing line seems to have pushed higher.
Earlier in the K-shaped cycle, we saw the split as being mainly between affluent households and everyone below them.
However, BofA’s latest data looks a lot different: lower-, middle- and most higher-income households are converging, while the top 5% remains the exception.
Their spending growth is still running at 1.5 percentage points quicker than everyone else’s, with BofA pointing to booming stock markets and wealth effects as major reasons.
In many ways, that suggests that the K might be less about income and more about ownership.
Specifically, cash flows are converging. Even discretionary spending, taking out necessities such as gasoline and groceries, shows the gap narrowing.
Moreover, restaurant spending levels have actually crossed over, with lower-income growth recently running slightly higher than higher-income spending. Airlines and clothing remain important exceptions. However, balance sheets remain divided.
Higher-income households are still more exposed to stocks and homeownership, while lower-income consumers are more likely to rent. BofA says the productivity gains are flowing substantially into the stock market, underscoring the wealth advantage at the top.
That is why this convergence might still prove fragile.
BofA simultaneously expects 75 basis points of Fed hikes this year, and Bhave openly acknowledged that higher rates could potentially hurt lower-income households a lot more through the delinquency channel.
So the irony is hard to miss: the Fed might end up reopening the very K that is now closing.
For investors, that makes wages, rates, stock market wealth and consumer credit the key fault lines to look for ahead.
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