From E to IRA: These Letters are Defining the Economy

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In recent years, economists have described the economy as “K-shaped,” with higher-earning households continuing to spend and drive growth (the top of the “K”), while lower-income Americans pulled back (the bottom).

But the wealth gap in America is taking a new shape. As inflation lingers, gas prices skyrocket, housing remains unaffordable for many and job security feels less certain, more Americans — especially those in the middle — are tightening up their finances.

As middle-income Americans change spending habits, they’re splintering from the top of the “K” and forming a third tier. The result is what some analysts describe as an “E-shaped” economy. It may sound like alphabet soup, but the shape reflects a more fragmented financial reality for U.S. households.

What’s driving the split

Three forces are widening the gaps between income groups:

Paychecks aren’t growing like they used to. Middle- and lower-income households’ wages are not keeping pace with those of higher income households. Over the past year, Bank of America Institute data shows higher-income households saw wage growth of about 5.6% year-over-year in March — the strongest since August 2021 — while middle- and lower-income households saw gains of just 2% and 1%, respectively. The gap is the widest since the bank began tracking it in 2015.

Your dollar still isn't going as far as it used to. Persistent inflation has taken its toll on Americans trying to afford essentials. A December report from the Brookings Institution found that about one-third of middle-class families struggle to make ends meet.

So people are pulling back. Middle-income households increased their spending by just 1.7% over the past year, compared to 2.9% for higher earners, according to Bank of America Institute data for March. That's the biggest gap between those two groups since mid-2022, BoA said.

Where are you in the E-shaped economy?

There are three tiers in the E-shaped economy, each representing one of the horizontal bars of the letter E.

Top of the "E": Higher income households — roughly 19% of the population — earn greater than $169,800 annually, according to Pew Research Center. Members of this group haven't changed their spending habits much — and they're carrying the economy as a result. The top 10% of earners account for roughly half of all U.S. consumer spending, per Moody's Analytics.

Middle of the "E": Middle income households — roughly 52% of the population — earn between $56,600 to $169,800 annually, according to Pew Research Center. This group is feeling the squeeze and pulling back. Middle-income Americans are the most likely to have a credit card — and to carry a balance on it month to month, per Federal Reserve data.

Bottom of the "E": Lower income households — roughly 28% of the population — earn less than $56,600 annually, according to Pew Research Center. Lower-income Americans lean heavily on credit, including payday loans and Buy Now, Pay Later products. They're less likely to have credit cards or bank accounts, but those who do tend to carry balances.

Why it matters

Your position in the “E” is increasingly tied to measurable differences in your spending power, savings buffers and reliance on debt. It also gives you a sense of how well you can weather future economic stress. Households that are feeling financial pressure may need to reassess their spending now.

Learn more about what defines the “E-shaped” economy here.