K-shaped economy and 'collective holding of breath' about the AI bubble both appear in Fed's temperature check | Fortune

"The Federal Reserve's latest Beige Book shows a sharply diverging U.S. economy, where affluent households continue to spend while lower- and middle-income consumers begin to buckle under financial pressure: the clearest sign yet that the economy is splitting into something unmistakably K-shaped. The Fed's latest report describes a widening gap between America's social classes, with "early signs of strain on middle-income consumers.""

"On the lower end, households are cutting back on dining out, trading down to cheaper groceries, getting "sticker shock" from car prices, and responding more sharply to price increases. Retailers across several Fed districts noted that budget-conscious shoppers have become increasingly sensitive to small changes in prices or promotions. Fast-food chains also saw a "notable decline in sales" as lower-income diners pulled back."

"At the top of the income distribution, the picture looks very different. High-income households - those who benefit most directly from asset appreciation - continue to spend robustly. Travel bookings remain strong, discretionary purchases are holding up, and "higher-end retail spending remained resilient." The anecdotal evidence from different industry leaders echoes what has been clearly showing up in the data."

U.S. consumer spending is diverging sharply along income lines, producing a K-shaped economy. Lower- and middle-income households are exhibiting early signs of strain, cutting back on dining out, trading down groceries, and reacting more to price increases, with fast-food sales declining. Budget-conscious shoppers are increasingly sensitive to promotions. In contrast, high-income households supported by asset appreciation continue robust discretionary spending, travel, and higher-end retail resilience. The top 10% of households now account for roughly half of U.S. consumer spending. The recent surge in AI-related stocks has materially boosted wealth for the richest households, underpinning their spending.

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