Bank of America's internal data show the middle class is now feeling the pain of the K-shaped economy

By Steve Goldstein

Lower-income households are increasingly doing their shopping at discount stores, says Bank of America.

Tuesday's lackluster retail-sales report alarmed some on Wall Street about the state of the U.S. economy, and Bank of America's internal data might be even more concerning.

A report from the Bank of America Institute asks whether the K factor - from the term K-shaped economy, which has been used to describe the diverging fortunes between higher- and lower-income American households - is now spreading to the middle class.

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The gap between spending growth among higher-income households and everyone else has grown to its widest point since the middle of 2022, the B. of A. institute found.

While upper-income household spending rose 2.5% in January on a year-on-year basis, the spending increase was 1% among middle-income households and just 0.3% for lower-income households, the bank found.

The gap in after-tax wage growth was the widest in nearly five years between higher- and middle-income households, the report added.

The report found that consumers are adapting to affordability issues by trading down to less expensive goods and services - for example, shopping at value-oriented grocers instead of premium grocery stores.

This has extended to housing, where some are renting smaller units or have moved to less expensive locations.

The report did say higher refunds on 2025 income taxes could help prop up consumers, and it said consumer finances still appear to be in relatively good health.

Bank of America's report is drawn from its assessment of its own debit- and credit-card transactions as well as bank-account information.

Read on: The great 'shrinkflation' of housing in America: What $500,000 buys today vs. what it bought in 2019

-Steve Goldstein

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02-11-26 0825ET