Franklin Templeton: "U.S. Economy Is an Upward-Tilted E, Not K; Claims of Polarized Consumption Overstated"

Global asset management firm Franklin Templeton has challenged the widely cited "K-shaped" economy theory regarding the United States, arguing that the current U.S. economy is better described as an "upward-tilted E," citing strong consumer activity and broad-based income growth.

In a report released on May 13, Franklin Templeton pointed out that the recent popularity of the K-shaped economic outlook in the market is based on potentially misleading historical data, with changes in consumption patterns and resulting economic vulnerabilities being overly exaggerated.

The K-shaped economy theory posits that while high-income groups benefiting from rising asset values continue to spend, lower-income groups, facing high inflation and stagnant wages, cut back on expenditures, thereby making economic growth structurally dependent on a minority. Agencies such as Moody's have claimed that the top 10% of households account for nearly half of total consumption.

Franklin Templeton noted that the Federal Reserve data underpinning these claims relies on a triennial survey that ended in 2022, thus failing to reflect current trends. In contrast, the latest survey by the U.S. Bureau of Labor Statistics (BLS) shows that the consumption share of the top 10% has remained stable at around 25% for several decades.

The report analyzed that, in reality, consumption patterns show an upward-tilted E shape, where temporary widening of disparities between income groups is quickly followed by parallel increases in consumption across groups. Supporting data from Bank of America's card spending and the New York Federal Reserve’s economic heterogeneity indicator reinforce this view. In March of this year, the Minneapolis Fed also concluded that current data do not support the K-shaped economic scenario.

The report also emphasized that concerns about the vulnerability of U.S. consumption are overstated. The gap in consumption between different income groups is not significant, and wealthier households possess enough of a buffer that a stock market correction is unlikely to trigger a sharp drop in consumption.

Furthermore, the report argued that the K-shaped economic narrative overlooks the fact that income growth across all groups has contributed to the economy’s resilience. While inequality remains an issue that must be addressed, during periods when incomes are rising for all groups, even if some receive greater benefits, the overall economic resilience is strengthened. According to a recent study, from 1979 to 2024, the proportion of the poor and lower-middle class declined from 53.8% to 34.5%, while the proportion of the middle and upper-middle class increased from 45.9% to 61.9%. Notably, the share of the upper-middle class grew by more than 20 percentage points, marking substantial growth.

Sonal Desai, Chief Investment Officer (CIO) of Franklin Templeton Fixed Income Division, stated, "Predictions of the collapse of the U.S. economy have surfaced frequently. However, as acknowledged by Federal Reserve Chair Jerome Powell, the U.S. economy has continued to demonstrate remarkable resilience despite shocks such as high interest rates, tariffs, government shutdowns (temporary work stoppages), the Russia-Ukraine war, and the Iran war." She added, "Even the hypothetical scenarios proposed by K-shaped economy proponents will be sufficiently weathered." She further advised, "Rather than preparing for a K-shaped collapse scenario, investors should seek out investment opportunities in an uneven and volatile, yet much more robust economy than depicted by the media."