‘E-shaped’ economy replacing K-shape in 2026, economist says
It’s difficult to describe the U.S. economy in black-and-white terms like “good” or “bad.” The data shows that the economy is healthy in many respects. But surveys show American consumers don’t feel that way.
“There’s no question right now that different data may show slightly different narratives,” says Heather Long, chief economist at Navy Federal Credit Union.
Depending on which metric you look at, inflation has either fallen or remained stable in recent months, Long notes. The consumer price index has fallen from its 9% peak in June 2022 and has hovered around 3% since June 2023, according to U.S. Bureau of Labor Statistics data. Personal consumption expenditures remained relatively stable last year and stood at 2.9% in December 2025. Bureau of Economic Analysis.
But prices for many consumer goods remain well above 2020 prices, and wages have remained roughly flat during that time when adjusted for inflation, according to nonpartisan economic research group The Hamilton Project. This disparity may be contributing to Americans feeling bad about the economy. Consumer confidence fell by approximately 13% year-on-year as of February. University of Michigan Consumer ResearchIt is published monthly.
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Many economists have described the U.S. economy as “K-shaped” in 2025; This showed how well-off high-income earners are doing (continuing to spend and spurring economic growth) while lower-income Americans are pulling back.
Long, who is among the economists who use the term “K-shaped”, says the economy is heading towards an “E-shape” in 2026, where consumer behavior has three stages instead of two. The middle group differentiates itself, he says, and the behavior of these people begins to show that they are experiencing increasing signs of tension.
Here’s what he saw.
Top level: ‘Consumption is increasing significantly’
Like the top tier of the K-shaped economy, the top tier of the E-shaped economy consists of high-income earners—consumers who continue to spend money despite high prices. The top 20 percent of income earners account for nearly 60 percent of all consumer spending in the United States. The latest analysis from Moody’s Analytics was found.
“This is high level [of earners] that’s going really well, which is driving a lot of consumption,” says Long.
Difference between K-shape and E-shape: Middle-income spending growth was closely aligned with high-income spending growth until it began to diverge toward the end of 2025. Bank of America Institute data It was published in February. The bank reported that as of January, the difference between annual spending increases of high-income households and all other households reached its highest level since mid-2022.
Wealthy consumers don’t always keep buying things they already have, despite high prices. Long says some retailers and brands, particularly in the food and hospitality sectors, are increasingly increasing their premium offerings to attract big spenders.
Premium credit cards like the Chase Sapphire Reserve and AmEx Platinum recently raised their annual fees to $795 and $895, respectively, claiming the additional benefits will attract higher-earning cardholders. “Look at those special platinum credit cards,” says Long. “Almost every company is trying to move up the value chain, and you can see that in their earnings releases.”
The strategy has paid off for airlines, hotel brands and food and beverage companies, which have reported strong demand for their existing and new premium offerings since fall 2025, even as sales of their standard and discounted products have slowed.
Middle layer: ‘Water processing’
Long says spending behavior among middle-class Americans is where you start to see signs of the affordability crisis. They still spend on their own needs and some discretionary categories, but “the middle class is still treading water to pay their bills,” he says.
Long calls this phase the “Costco economy,” referring to consumers who are not yet in a full-blown panic but are increasingly shopping at discount and wholesale retailers like Costco and Walmart to get the most bang for their buck.
“Frankly, they’re spending nervously,” he says. “They feel like they have to stretch every dollar they think they have to buy in bulk, they’re doing whatever they can [to save]”
Regardless of where they shop, a growing number of American households are living paycheck to paycheck. For about 24 percent of households, expenses made up the majority of their earnings in 2025. Data from Bank of America Institute It was released on November 10. The bank’s report describes “paycheck-to-paycheck” costs for basic needs like housing, food, utilities, gas, child care and more exceeds 95% of revenue.
The bank’s researchers found that the share of households living paycheck to paycheck has increased since at least 2023.
Middle-class households may be getting by for now, but Long says they’re experiencing waves of stress. “Not only are they facing high prices, but every few months something else goes up,” he says. Eggs, for example, aren’t as expensive in 2026 as they were in 2025, but beef prices rose 22% in January from the previous year, according to the Labor Department.
“This is just whack-a-mole inflation,” Long says.
Lower tier: Borrowing
The bottom tier of the e-form economy is characterized by high credit card usage and Buy Now, Pay Later use, Long says.
While middle- and high-income earners certainly use credit cards and sometimes carry a balance on them, lower-income earners are more likely to report carrying a balance. Among cardholders earning between $25,000 and $49,999, 59 percent say they carried a balance from month to month at least once in the past year, according to the Federal Reserve’s latest report Consumer Finance Survey It was performed in October 2024 and released in May 2025.
Half of cardholders earning between $50,000 and $99,999 said they carried a balance at least once in the past year, compared to just 38% of those earning $100,000 or more.
When it comes to Buy Now, Pay Later plans, adults earning between $25,000 and $49,999 were most likely to have used an installment loan in the past year, the Fed’s report says. Among survey respondents, low-income households earning less than $25,000 were the most likely to report late payments to a Buy Now, Pay Later plan, the data shows.
A quarter of Buy Now, Pay Later users reported using credit for shopping in 2025, up from 14% in 2024. LendingTree survey.
Long says the 2026 tax season could be a lifeline for middle- and lower-tier Americans. More than a third (35%) of Americans expecting a tax refund on February 23 say they will use at least some of it to pay off debt Intuit TurboTax survey to create. But Long says even big refunds are a temporary solution to the ongoing affordability problem.
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