To: Investment Team
From: Senior Economist
Date: May 2, 2026
Subject: Federal Reserve District Research Briefing
Based on the recent monitoring window, the available research is heavily concentrated on consumption divergence. While the volume of significant publications was low this period, the New York Fed's work on economic heterogeneity is critical for our current positioning.
1. [NY] Explaining the K-Shaped Economy: What’s Behind the Divide?
This research utilizes Economic Heterogeneity Indicators (EHIs) to demonstrate that recent retail spending growth is being driven almost exclusively by high-income households. For our outlook, this suggests that aggregate consumption figures are masking significant fragility in lower-income tiers, increasing the risk of a sudden consumption cliff if high-end sentiment shifts.
2. [NY] Tracking the K-Shaped Economy: Who’s Driving Spending?
The authors highlight that while real consumer spending has risen solidly since 2023, the gains are not widely shared across society. This divergence complicates the Fed's policy path, as traditional aggregate data may signal a need for tightening to curb inflation, while the underlying "K-shape" suggests that lower-income households are already experiencing a contraction.
Synthesis:
The current economic expansion is precariously reliant on high-income consumption, creating a bifurcated recovery that is less resilient than headline GDP suggests. This divergence increases the probability of a policy error, as the Federal Reserve must balance aggregate growth against widening socioeconomic instability.
In our companion post, we used a new module of our Economic Heterogeneity Indicators (EHIs) to shed light on how recent retail spending growth has been driven by high-income households. This fact is consistent with the popular press’s idea of a “K-shaped economy” in which higher-income households experience faster growth in spending than lower-income households. In this post, we dive deeper into the reasons behind this divergence by analyzing for which goods this trend holds true and ask whether it can be explained by changes in wages, inflation, or wealth. We find that, since 2023, wealth has
Aggregate real consumer spending has risen solidly since 2023. However, it is less clear how widely shared this improvement has been across all segments of society. This is important because systematic heterogeneity may mask the dependence of aggregate growth on a relatively small group of households and thus conceal macroeconomic risks. In this post, we use consumer spending data recently added to the Economic Heterogeneity Indicators (EHIs) and find that retail spending growth has been driven by high-income households—those earning more than $125,000 per year. In the popular press, the pheno
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