Welcome to this month's economic outlook.

My name is Natalie Gallagher and I am a principal economist

and director at Board.

Today I'm going to spend a little bit

of time going over the K-shaped dynamic

that we're seeing in the US economy,

why this presents a key economic risk as we head into 2026.

Now, to really start out,

when we look at the KS shaped dynamics,

which in this instance is primarily centered on the fact

that high income consumers continue to spend

and really drive the consumption growth

that we've been experiencing in the economy, whereas lower

and middle income consumers are,

are stalling out in terms of economic growth.

We have to focus on three key risk profiles.

First and foremost, high income consumers

or high income households, top 20%, they now drive about 63%

of consumer spending growth.

That's up from just 55% last year.

That's a really concerning acceleration of

what we're calling these khap dynamics.

Second, middle

and lower income households contribute just 37%

combined in 2025.

That's down from 45% in 2024.

What's really driving this is persistent inflation

and labor market softness.

Those are really constraining

discretionary spending for these groups.

And most importantly, sort of the critical vulnerability

that really ties it all together is the fact

that the affluent spending we are seeing

and the growth there, is really heavily tied

to AI driven asset appreciation

that's benefiting these affluent households.

Now, as economists, this is a key risk

that we're tracking very carefully

because it means that growth is not broad-based, right?

It's on a very narrow foundation.

When we look visually what this looks like by the numbers,

what we see is that the top 20% of households by income,

they now generate nearly two thirds

of all consumer spending growth.

We have low income households,

they're at less than 10% middle income, 28%.

You can see high income there, 63%.

And like I said, this creates acute concentration risk

as we look at how likely is this growth

to be sustainable throughout 2026.

Now, we also have to highlight, right,

that this isn't really static.

This isn't a static number.

This is actually accelerating a trend

that's accelerating in 2025, um,

and anticipated to be quite tricky in 2026.

So look at the purple line right here.

High income share has risen from

around 55% in early 20 24, 60 7% in Q3

2025, which is the most recent data that we have.

Now, meanwhile, middle and low income contributions,

that's gonna be the, the blue lines here.

They continue to compress.

And this pattern is really consistent

with wealth effect driven consumption, which is really

where we see these wealth effects taking,

taking part in the economic expansion rather than income

gains that are allowing for sort of the lower, um,

lower income cohorts to also pick up their spending as well.

So natural next question is what's driving this?

What's allowing for this escalation

in affluent household spending?

And of course we have to go back

to tech, we have to go back to

Ai. So when we

look at what's really been driving these equity

gains, um, the,

the purple area shows tech industry performance versus the

broader s and p 500.

And you can see that tech has dramatically outperformed,

especially since 2023, right?

The AI boom and high income households,

they hold the vast majority of equity wealth.

And so when tech rallies their portfolios appreciate,

they feel wealthier, they're able to spend more.

And this of course is creating

that concentrated vulnerability

that we've really highlighted throughout

the past couple of minutes.

Now, of course, in this environment there's plenty of risks,

but there's also opportunities.

And so from a strategic point

of view, what do we need to track?

First and foremost, we have a primary downside risk, right?

And that's asset market corrections inequities

that would disproportionately impact those

high income consumers.

And that's gonna be a tail risk we're gonna need

to monitor very closely in 2026.

Second, we're in a, a complex policy environment, right?

The fed faces a really difficult trade off.

We've talked about this before,

but of course if we get further easing, then

that risks re-acceleration inflation

through these wealth effects that we've talked about.

At the same time, we, if we get insufficient accommodation,

there are risk to employment deterioration,

which is continued to prove quite soft

as we get into the heart of 2026.

Third, we have sustainability concerns, right?

The current expansion, it relies on very narrow drivers

rather than broad based gains.

And so this really limits durability

and increases volatility.

So we're building on a narrow foundation. So what can we do?

We can monitor priorities, right?

We need to track equity, market volatility,

housing price trends, consumer credit delinquencies,

especially among middle

and lower income households as sort

of an early warning signal as well

as labor market stabilization.

And these are really gonna be key leading indicators

as we get into 2026

and what economic growth really looks like.

So in short, growth looks, the baseline is

for continued growth in 2026,

but of course the foundation is quite fragile.

There are key risks that, that we absolutely acknowledge

and are tracking as we get into the heart of the year.

Um, and if you would like to know more about

how board can help facilitate you not only tracking these

key risks for your industry,

but also your company metrics as well,

please reach out and request a demo.

That that is all I have for you today.

So thank you for listening

and I hope you have a wonderful rest of your week.