Special K economy
Special K economy
Summary
The term ‘K economy’ is entering economic commentary as an explanation for why the US economy keeps on growing robustly. This is being used as short-hand to describe the situation in the US, where those with the highest salaries are seeing their wages rise more quickly than those on low wages. This is in contrast with the past decade where low wages rose faster than high wages, at least in percentage terms. The drop in wage inflation for many households may explain why consumer sentiment is depressed even though overall spending remains robust.
This has shifted focus onto the extent by which US consumer spending is driven by the high-income households. 50% of total US pre-tax income and nearly 40% of total US consumption is driven by those consumers in the highest 20% income bracket. And over the past year, the highest earning workers are enjoying the fastest wage inflation. Whilst this continues, it is likely that the US consumer (or at least those with the highest incomes) will carry on spending and carry the US economy on their wallets.
K is also an economist’s shorthand for investment. K represents Capital in many macro-economic models. Capital expenditure has been a key driver of economic growth in the US in the first half of 2025. Even more acutely, investment spending on Information Technology (Information Processing Equipment + Computers and Software specifically) have contributed more to economic growth in the first half of 2025 than Household Consumption (as measured by Personal Consumption expenditure). Spending on Artificial Intelligence (AI) is a making a real economic difference. The next set of company updates may provide a guide to how long spending on AI will continue.
The French Prime Minister Lecornu resigned on 6th October after being appointed on the 9th of September 2025, and 12 hours after appointing his Cabinet. Lecornu was the fifth Prime Minister since President Macro’s re-election in 2022. The new Prime Minister, appointed on the 10th of October, is Lecornu. The same Lecornu who resigned 4 days previously.
The UK’s inflation rate is higher than in Europe or the US. This may be linked to the double-digit wage inflation received by low wage workers over the past few years. Wages at the bottom end of the wage spectrum have been influenced by the Government policy of raising the minimum wage over the past few years (under both Labour and Conservatives). The announcement of the annual increase in National Minimum Wage is due at the Budget in November and probably gets less attention than it should in political and economic commentary despite the economic consequences.
K economy
‘Don’t bet against the US consumer’. One of the ‘truths’ of an investment career. The strength of the US consumer is being questioned as the labour market is weak and unemployment is edging higher. Headline data suggests that the US economy is buoyed by seemingly healthy aggregate consumer data. Real consumer spending rose 0.4% in August, which is encouraging on the surface, but peel back the layers and the story is more fractured, which is reflected in the consumer sentiment indicators.
Over the past 10 years, workers in the US with the lowest wages have enjoyed the fastest rate of wage of inflation. Researchers at the Federal Reserve of Atlanta divide workers by salary levels. Between 2015 and 2020 (so excluding the impact of Covid) wages for the 25% lowest paid workers grew by around 1% more each year than the highest paid 25% of workers. Between 2020 and 2024, the lowest paid enjoyed 1.7% excess wage inflation compared to their highest paid peers. Since the start of 2024 this wage inflation gap has started to reverse. The lowest paid workers are seeing lower wage inflation than high-income workers.
With inflation remaining elevated, the lowest paid workers are now enjoying lower real wage increases than in recent years. The silent majority is feeling the squeeze. Real disposable income rose by 1.9% year over year, which is down from 2.8% last year. And for lower wage workers this squeeze is more intense as they have received lower wage increases than the average.
Workers on low wages are receiving smaller wage increases than those on the highest wages, which is an unusual state of affairs the labour market
Source: Bloomberg, Artorius
Narrowing spending power
The chart on the right shows the share of US household income and consumption by income brackets (divided into quintiles – 20% shares). The highest earning 20% of households enjoy 50% of the total US pre-tax income and nearly 40% of the US consumption. Put together with the next 20%, the top earning 40% of households have 75% of the total income and account for over 60% of US consumer spending. These households are currently enjoying faster wage growth than other households, so are likely to continue to spend.
Lower income households are facing smaller wage increases but economically have less impact in driving US consumption growth. The top of the economy is booming while Americans on the lower end of the income spectrum are facing recession-like conditions.
Skewed income and spending by US consumers: Average spending and income for US households by pre-tax income 2023
Source: US Bureau of Labor Statistics, Artorius
The gap between the spending power of the highest income and the lowest income households is not new. But the growing gap between their income wage inflation, with the highest earners enjoying higher wage inflation, does explain the gap between depressed consumer confidence and resilient consumer spending.
Economic growth is dependent on consumer confidence, but in an economy that is skewed towards high income households the headline confidence reading may be misleading. If high income households are benefitting from rising wages then US consumer activity may continue to be surprisingly strong even in the face of weak overall US consumer confidence.
There is a growing gap between how US consumers feel (low level of consumer confidence) and resilient retail sales activity
Source: Bloomberg, Artorius
K is for capital
For those with an economics education, K represents Capital in many macro-economic models. Capital expenditure has been a key driver of economic growth in the US in the first of 2025. Even more acutely, investment spending on Information Technology (Information Processing Equipment + Computers and Software) has contributed more to economic growth in the first half of 2025 than Household Consumption (as measured by Personal Consumption Expenditure). Spending on Artificial Intelligence (AI) is a making a real economic difference.
Just for context Personal Consumption Expenditure has historically been responsible for around 68% of economic growth, so it being eclipsed by investment spending in one specific sector is historically rare.
Some investment commentators point out that the dominance within US equity markets of a relatively few large (very large) US technology companies is an investment risk. Economists are becoming aware that the US economy is also being driven along by the spending of these companies. For the time being the music from AI continues to play. When and if this investment is curtailed may determine both the fate of the US economy and the US equity market. As such the upcoming quarterly reports from US companies may be studied for clues about the profitability from AI spending.
Two-quarter average contribution to economic growth from personal consumption and spending on information technology
Source: Bloomberg, Artorius
What’s French for déjà vu?
French politics appears to be in flux. The French Prime Minister Lecornu resigned on the 6th October after being appointed on the 9th of September 2025, and 12 hours after appointing his Cabinet. Lecornu was the fifth Prime Minister since President Macro’s re-election in 2022. The new Prime Minister, appointed on the 10th of October, is the same Lecornu.
Should no viable coalition emerge, France may operate under a caretaker government for an extended period. While politically fragile, such a government could manage day-to-day affairs temporarily. However, it would struggle to address structural challenges, particularly the 2026 budget, and risks prolonging uncertainty at a time of heightened political sensitivity. Furthermore, appointing a centrist PM and operating under a caretaker government could be a challenge for President Macron, especially as both the far-right and the left made it clear after the results of the confidence vote that no more centrist PMs will be supported.
The challenge for French policy makers is similar to those facing many western economies: low economic growth, high levels of public debt and on-going government deficits with limited (or no) stomach to cut public spending to affordable levels. With over a month to go to the UK Budget, the UK should be relieved that the political chaos is yet to descend on perfidious Albion.
UK inflation: a political own goal?
The UK inflation backdrop is proving to be more challenging than in other countries. Throughout 2025 the UK has had higher inflation than both the US and Europe. So, blaming global factors isn’t really an option for the Bank of England.
The inflation issue is not just in consumer prices, but also in wages. Indeed, the global recruitment company, publishes data that tracks salaries from online job adverts. From this they produce an estimate of the annual change in salaries for jobs being posted online. In the UK, Indeed estimate that jobs with online postings are seeing wage inflation of 5.6% year on year compared to 2.6% in both Europe and the US.
UK wage data from the Office of National Statistics, breaks down wages by income spectrum. In contrast with the US, the lowest paid in the UK have been receiving the highest wage inflation. Employees in the bottom 25% of the wage spectrum have been seeing wage inflation of around 8% whilst the highest earners have seen wage inflation of around 4%.
Some of the wage inflation seen at the bottom end of the wage spectrum will be a result of the decision of the government in raising the National Minimum Wage by 12% for over 21-year-olds and up to 21% for under 18s in 2024. In 2025 the National Minimum Wage increased by 6.7% for over 21s and by 18% for under 18s. The wage setting for the young and low paid may be feeding through into the overall inflationary backdrop for the UK resulting in higher inflation and higher interest rates. It is striking that the mix of wage inflation is in stark contrast with the US.
It is likely that the Low Pay Commission will advise the government to set a 4.1% increase to the National Minimum Wage in 2026, but the actual outcome will be announced by the Chancellor at the Budget. Similar to the ‘triple-lock’ pension, politicians in the UK may have to slay a few political shibboleths to bring back growth and fiscal sustainability to the UK economy in coming years.
The UK has seen higher inflation in 2025 than in Europe or the US
Source: Bloomberg, Artorius
UK wage inflation by income spectrum: lower wages have increased by more over the past few years than higher salaries
Source: Bloomberg, Artorius
Conclusion
The term ‘K economy’ is entering economic commentary as an explanation for why the US economy keeps on growing robustly. This is being used as short-hand to describe the situation in the US, where those with the highest salaries are seeing their wages rise more quickly than those on low wages. This is in contrast with the past decade where low wages rose faster than high wages, at least in percentage terms. The drop in wage inflation for many households may explain why consumer sentiment is depressed even though overall spending remains robust.
This has shifted focus onto the extent by which US consumer spending is driven by the high-income households. 50% of total US pre-tax income and nearly 40% of total US consumption is driven by those consumers in the highest 20% income bracket. And over the past year, the highest earning workers are enjoying the fastest wage inflation. Whilst this continues, it is likely that the US consumer (or at least those with the highest incomes) will carry on spending and carry the US economy on their wallets.
K is also an economist’s shorthand for investment. K represents Capital in many macro-economic models. Capital expenditure has been a key driver of economic growth in the US in the first half of 2025. Even more acutely, investment spending on Information Technology (Information Processing Equipment + Computers and Software specifically) have contributed more to economic growth in the first half of 2025 than Household Consumption (as measured by Personal Consumption expenditure). Spending on Artificial Intelligence (AI) is a making a real economic difference. The next set of company updates may provide a guide to how long spending on AI will continue.
The French Prime Minister Lecornu resigned on 6th October after being appointed on the 9th of September 2025, and 12 hours after appointing his Cabinet. Lecornu was the fifth Prime Minister since President Macro’s re-election in 2022. The new Prime Minister, appointed on the 10th of October, is Lecornu. The same Lecornu who resigned 4 days previously.
The UK’s inflation rate is higher than in Europe or the US. This may be linked to the double-digit wage inflation received by low wage workers over the past few years. Wages at the bottom end of the wage spectrum have been influenced by the Government policy of raising the minimum wage over the past few years (under both Labour and Conservatives). The announcement of the annual increase in National Minimum Wage is due at the Budget in November and probably gets less attention than it should in political and economic commentary despite the economic consequences.
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