Bank of America's latest data shows household spending growth converging across income groups, challenging the K-shaped recovery narrative and raising new questions about the durability of recent gains for lower-income Americans
Last summer, Bank of America analysts warned that the U.S. economy was splitting into two distinct tracks: affluent households enjoying rising asset values and robust spending, while lower-income Americans faced persistent inflation and higher borrowing costs. The term "K-shaped recovery" captured this divide, with one segment moving up and the other struggling to keep pace.
But new data from Bank of America suggests that the gap in consumer spending growth between income groups has narrowed sharply in recent months. According to the bank's internal figures, discretionary spending by lower-, middle-, and higher-income households is now growing at roughly the same annual rate-about 5%. This marks a significant change from the previous 12 to 18 months, when high-income households consistently outpaced others by 1 to 2 percentage points each month.
Spending Patterns Converge
The convergence is most visible in discretionary categories, such as dining out and non-essential purchases, where spending growth rates have aligned across most income brackets. Bank of America's economists describe this as a "closing of the K," though they caution that the shift may not be permanent. The top 5% of earners remain an exception, with their spending growth still running about 1.5 percentage points ahead of the rest, largely due to gains from the stock market and other assets.
This new pattern complicates the narrative of a deeply divided economy. While cash flow behavior is converging, the underlying wealth gap remains. High-income households continue to benefit from elevated stock and home values, while lower-income Americans are less likely to own such assets and more likely to rent.
For context, the Bureau of Labor Statistics reported that real average hourly earnings fell 0.2% year-over-year in July, while the unemployment rate held at 4.1%. These figures highlight the ongoing challenges for many workers, even as spending data shows some improvement at the lower end of the income spectrum.
Income Gains and Their Limits
One of the most notable developments is the recent acceleration in after-tax wage growth for lower-income households. For much of 2025 and early 2026, these households saw after-tax income gains of just 1% to 1.5%. Over the past few months, however, Bank of America reports that growth has jumped to around 5%, matching or even exceeding other groups at times. This has translated into stronger card spending among lower-income consumers, with growth rates also near 5%.
Bank of America attributes much of this improvement to increased job switching among lower-income workers, which can result in after-tax pay increases of up to 10%. Another possible factor is a reduction in tax withholding, which temporarily boosts take-home pay but does not reflect a true increase in wages. The distinction matters: if wage growth is genuine, the improvement could be sustainable; if it's driven by withholding changes, the effect may be short-lived.
Importantly, the bank does not see clear evidence that households are financing higher spending through savings drawdowns or increased credit card debt. Balances for households earning under $50,000 have remained relatively stable year-over-year, and there are no major signs of rising financial stress in this group.
Risks and Fragility Remain
Despite the recent convergence, Bank of America warns that the K-shaped dynamic could re-emerge if economic conditions shift. The top 5% of earners continue to pull ahead, thanks to outsized exposure to the stock market and real estate. Meanwhile, the durability of income gains for lower-income households remains uncertain, especially if wage growth slows or if higher interest rates begin to bite.
Bank of America expects the Federal Reserve to raise rates by another 75 basis points this year, a move that could disproportionately affect lower-income borrowers through higher delinquency rates. The bank's economists note that while spending patterns have converged, the underlying wealth divide has not closed-and could widen again if market or policy conditions change.
For investors and policymakers, the key variables to watch are wage growth, interest rates, stock market performance, and consumer credit trends. These factors will determine whether the recent convergence in spending is a lasting shift or a temporary pause in a longer-term divergence.
Recent coverage of Bank of America's outlook on individual stocks, such as its cautious stance on Target's rally ahead of earnings, can be found in related reporting at this analysis of retail sector pressures.
While the K-shaped recovery narrative may be losing some of its edge, the U.S. economy remains a complex landscape where income, wealth, and opportunity are still unevenly distributed. The latest data offers a snapshot of progress, but also a reminder of the fragility beneath the surface.
The concept of a K-shaped recovery highlights how economic shocks and recoveries can affect different groups in sharply divergent ways. In this framework, one segment of the population-often those with higher incomes or more assets-benefits from rising markets and job opportunities, while others face stagnant wages, higher costs, or job insecurity. Understanding these dynamics is crucial for policymakers and investors, as shifts in spending, income, and wealth distribution can influence everything from consumer demand to credit risk and long-term economic growth.
