K-shaped divide deepens as top 10% outspend bottom 70%

The top 10% of U.S. households by income spend almost as much on non-essential goods and services as the bottom 70% combined, Bank of America economists found in a July 7 analysis that lays bare the depth of the K-shaped recovery.

"The divergence in discretionary spending between high-income and lower-income households has widened to levels not seen in recent history," the Bank of America Institute economists wrote in the report, which examined internal card spending data alongside broader consumer finance metrics.

The top decile's discretionary outlays — covering dining, travel, entertainment and luxury goods — now rival the combined spending of the seven lowest deciles, the analysis showed. By contrast, the bottom 70% of households have directed a rising share of their budgets toward essentials such as housing, groceries and healthcare, leaving less room for discretionary purchases. About 24% of U.S. households lived paycheck to paycheck in 2025, according to a separate Bank of America Institute analysis, with the squeeze hitting 29% of lower-income households.

The findings underscore a consumer economy that is effectively two markets. High-income households, buoyed by rising asset prices and pandemic-era savings that remain concentrated at the top, continue to drive demand for premium experiences and goods. Lower- and middle-income households face persistent pressure from elevated living costs and depleted savings buffers, constraining their purchasing power.

The K-shaped dynamic has implications for both monetary policy and corporate strategy. The Federal Reserve, which has held its benchmark rate at 5.25% to 5.5% since July 2023 after a cumulative 525 basis points of hikes, faces a delicate balancing act. While resilient spending among affluent households supports overall economic growth and keeps inflation above the central bank's 2% target, weakening consumption among the bottom 70% could accelerate a slowdown that pressures the Fed toward rate cuts. Interest-rate futures currently price a 58% probability of a quarter-point cut at the September meeting, according to CME FedWatch data.

For investors, the divergence creates a clear sectoral divide. Companies catering to higher-income consumers — luxury retailers, premium travel operators and high-end dining chains — are likely to continue benefiting from robust demand among the top decile. Mass-market retailers and consumer discretionary names exposed to lower- and middle-income households face a more challenging environment as their core customer base tightens budgets.

The top 10% of earners reported adjusted gross income of $178,611 or higher for the 2022 tax year, the latest Internal Revenue Service data show, while the top 1% threshold stood at $663,164. The national median household income was $81,604 in 2024, according to the U.S. Census Bureau. Average total consumer debt stood at $104,215 as of September 2025, Experian data show, with average credit card balances at $6,501.

The spending gap also carries political weight. The widening inequality between high-income households and the rest of the population has become a central theme in the 2026 midterm election campaign, with both parties proposing competing tax and spending plans that could reshape the consumer landscape depending on the outcome.

This article is for informational purposes only and does not constitute investment advice.