Americans are feeling the impacts of the widely discussed "K-shaped" economy as 2025 comes to a close with rising wealth for higher-income individuals and higher prices and weaker income gains adding to the struggle for lower-income individuals.
Peter Atwater, an economics professor at William & Mary in Virginia, popularized the term "K-shaped" economy during the COVID-19 pandemic to show that even in economic downturns, there are still small groups of people who do well and move up in income and wealth. On the flipside, those on the lower points of the "K" tend to do more poorly in a recession.
"Typically in a recession, as we in a time of expansion, all boats sink a little in a recession and all boats are lifted up in a growing economy," said Paul Vaaler, a professor at the University of Minnesota's Law School and Carlson School of Management. "There are certain circumstances, and these are one of them right now, where we have this split."
When it comes to the broader, national economy, Vaaler sees owners of stocks and homes as those who fair well in a K-shaped economy.
"There are many individuals below the median income who don't," Vaaler said. "A lot of Minnesotans who are working day-to-day and paycheck-to-paycheck, they don't have that advantage of stock appreciation and haven't gotten the benefit of it. They've had the uncertainty that goes with recession factors, including factors tied to just normal ups and downs."
There are also factors tied to policies, including tariffs. As Vaaler explained, Minnesota exports a lot of goods including manufacturing, agriculture, and high-tech equipment around the world.
"When things are slower and there's more uncertainty due to trade policy, that's not good news for the Minnesota worker. That's one of the reasons why those who aren't owning stocks, don't own a home, or those who are in a export-oriented business are paying attention right now."
The state's reliance on agriculture also puts Minnesota in a unique situation compared to the rest of the country.
"Two years of declining income is not great for the rural economy which is so important to Minnesota," added Vaaler. "Part of that has to do with trade policy which has locked a lot of Minnesota farmers out of major markets like China."
Minnesota, in particular, has bankruptcies up 22 to 23% over last year. Small businesses are most impacted, including daycares and small proprietorships dealing with higher interest rates and uncertain input costs.