The U.S. Economy is Shifting from ‘K-Shaped’ to ‘E-Shaped,’ Navy Federal Economist Says

Describing the U.S. Economy as simply “good” or “bad” is an oversimplification. While some data points indicate economic health, consumer sentiment tells a different story. “There’s no doubt right now that different data can display slightly different narratives,” says Heather Long, chief economist at Navy Federal Credit Union [1].

Inflation and Consumer Spending

Inflation, depending on the measure, is either falling or remaining stable. The consumer price index has decreased from a peak of 9% in June 2022, hovering around 3% since June 2023, according to the U.S. Bureau of Labor Statistics. Personal consumption expenditures have also remained relatively flat, at 2.9% in December 2025, as reported by the Bureau of Economic Analysis.

However, prices for many consumer goods remain significantly higher than in 2020 and wage growth has plateaued when adjusted for inflation, according to research from The Hamilton Project. This disparity may contribute to negative consumer sentiment, which was down nearly 13% year-over-year as of February, according to the University of Michigan Survey of Consumers.

From ‘K-Shaped’ to ‘E-Shaped’ Recovery

In 2025, many economists described the U.S. Economy as “K-shaped,” with higher earners continuing to spend and drive growth while lower-income Americans curtailed spending. Long, who previously used the “K-shaped” descriptor, now believes the economy is evolving into an “E-shape” in 2026, characterized by three tiers of consumer behavior [2].

A growing middle group is emerging, experiencing increasing financial strain.

Top Tier: High Earners Driving Consumption

Similar to the upper part of the “K-shape,” the top tier of the “E-shaped” economy consists of high earners who continue to spend despite elevated prices. The top 20% of earners account for nearly 60% of all U.S. Consumer spending, according to an analysis from Moody’s Analytics.

“This top tier [of earners] that’s doing really well, that’s driving a lot of the consumption,” Long says.

Spending growth among middle-earners began to diverge from higher-earners toward the end of 2025, according to Bank of America Institute data released in February. As of January, the gap between high-income and other households’ annual spending growth reached its highest level since mid-2022.

Retailers and brands, particularly in the food and hospitality sectors, are increasingly focusing on premium offerings to attract these high spenders. Premium credit cards, such as the Chase Sapphire Reserve and AmEx Platinum, have recently increased their annual fees, anticipating that added perks will attract more high-earning cardholders.

Middle Tier: ‘Treading Water’

Middle-class Americans are showing signs of an affordability crisis. They are still spending on necessities and some discretionary items, but are essentially “treading water” to cover their bills.

Long refers to this tier as the “Costco economy,” noting that consumers are increasingly shopping at discount and wholesale retailers like Costco and Walmart to maximize their purchasing power. “They’re obviously spending in a nervous way,” she says, “They feel they need to stretch every dollar they feel they need to buy in bulk, to do whatever they can [to save].”

Nearly 24% of households had expenses exceeding 95% of their income in 2025, according to Bank of America Institute data. This share has been rising since at least 2023.

Middle-class households are facing recurring price surges, such as the 22% increase in beef prices in January, following a period of lower egg prices, Long notes. “It’s just whack-a-mole inflation,” she says.

Bottom Tier: Increasing Debt

The bottom tier of the “E-shaped” economy is characterized by high credit card and Buy Now, Pay Later (BNPL) usage. While higher earners also use credit cards, lower earners are more likely to carry a balance.

According to the Federal Reserve’s October 2024 Survey of Consumer Finances (released in May 2025), 59% of cardholders earning between $25,000 and $49,999 carry a balance from month to month, compared to 50% of those earning between $50,000 and $99,999, and 38% of those earning $100,000 or more.

Adults earning between $25,000 and $49,999 are most likely to have used BNPL plans, and those earning less than $25,000 were most likely to report late payments on these plans.

A February 2025 LendingTree survey found that 25% of BNPL users used the loans to pay for groceries, up from 14% in 2024.

Tax Season as Temporary Relief

The 2026 tax season may provide some relief for Americans in the middle and bottom tiers. Over a third (35%) of Americans expecting a tax refund plan to use at least a portion of it to pay down debt, according to an Intuit TurboTax survey from February 23. However, Long cautions that even large refunds are only a temporary solution to an ongoing affordability problem.