The American ‘K-economy’: myth or reality? - December 1st, 2025

The ‘K-economy’ evokes a two-speed US economy, with AI booming and the rest of the economy struggling. The reality of this K-economy must be put into perspective, but at this stage, it is contributing to stock market resilience by maintaining expectations of Fed rate cuts.

While US stock market valuations are soaring, consumer confidence as measured by the University of Michigan is plummeting (Chart 1). In stark contrast to the widespread euphoria of 1999-2000, this dichotomy between Wall Street and Main Street is fuelling the idea of an American ‘K-economy’, where a boom in artificial intelligence spending coexists with signs of recession.

Among the negative signals, concerns about consumption are emerging. Retail sales rose by only +0.2% in September, including inflation, and some companies such as Chipotle and Home Depot are warning of sluggish consumption among the most modest households. According to a popular theory, the US consumer economy is also in the shape of a ‘K’. Wealthy households, which are benefiting from the stock market wealth effect, continue to increase their consumption, while that of poorer households is declining in the face of weakened purchasing power and a sluggish labour market.

Official statistical tools cannot validate or invalidate this theory, as consumption data by income category is only available several quarters after the fact. However, some private companies are attempting to ‘track’ consumers in real time. Among these, the company ‘Numerator’ has calculated that consumption by households earning more than £100,000 per year increased by +4.3% in Q3 2025 (vs Q3 2024, including inflation), compared with +3.8% for those earning less than £60,000. The difference is there, but it is quite small. As for the lack of confidence shown by households, it is just as pronounced among the wealthiest as among the most modest (Chart 2).

The overall picture therefore remains fairly clear and relatively stable: since 2022, American households have shown low confidence, but consumption remains strong, even if it is gradually slowing down. After +2.9% in 2024 excluding inflation, it is expected to grow by +2.5% in 2025, despite the impact of customs duties. The consensus forecast is for a continued gradual slowdown in 2026, to +1.9%, but recent revisions are tending to be on the upside (Chart 3).

The sometimes-heard theory of a US recession masked by the AI boom is therefore difficult to defend at this stage, especially since AI's contribution to US GDP is often incorrectly calculated and therefore exaggerated. On the other hand, it is accurate to say that, excluding AI, the US economy has become more vulnerable due to the effect of tariffs, which are equivalent to a tax increase, lower immigration and a sharp decline in job offers.

As for the very depressed sentiment among households, this should be put into perspective, as since the Covid crisis, the difference between the two leading measures of household confidence has become striking (Chart 4). The University of Michigan measure is known to place a great deal of weight on inflationary perceptions and purchasing power, while the Conference Board measure is more balanced between assessments of inflation, income and the labour market.

This divergence allows us to understand that the issue of price levels, and therefore real and perceived purchasing power, is probably the main cause of the deterioration in sentiment. The Covid price shock will take time to digest – and the rise in customs duties has only revived the trauma.

The surprising situation in the property market is also weighing heavily. Despite the shock of interest rate hikes in 2022-2023, US property prices have not adjusted downwards. The result is an affordability crisis as severe as that of the 1980s, when long-term rates were well above 10% (Chart 5).

Between sentiment indicators that are sometimes overly depressed, difficult realities such as the property market, and a moderate slowdown in consumption, the overall picture is therefore that of a US economy where divergences and paradoxes abound. The idea of a ‘K-economy’ is therefore not entirely absurd.

For the financial markets, this is not necessarily bad news, as the lack of confidence in the economy – in addition to limited inflation despite tariffs – reinforces investors' view that the US Federal Reserve will respond to any signs of a slowdown. In fact, slightly weaker retail sales figures for September were enough to reignite expectations of a Fed rate cut on 10 December. Against a backdrop of rising corporate profits, this responsiveness is supporting the resilience of financial markets (Chart 6). It also reinforces our view that government bonds – whose prices are sensitive to falling interest rates – remain useful as a hedge for equity investments in the event that the US economy slows more than expected.