U.S. Analysis

The US consumer story is not one of broad-based strength, but rather one of older and wealthier Americans seeing a boom in income from liquid assets.

Overall, consumer balance sheets have strengthened in recent years, but this masks an underlying “K-shape” divergence; the top 10-20% of income earners—flush with appreciating liquid assets—are driving consumption growth despite a relatively lower marginal propensity to consume.

At the same time, the bottom 80% have minimal financial reserves. This concentration of spending power means aggregate demand is far more fragile than headline figures may suggest.

The notion of the K-shaped US economy is growing in recognition. It’s always been true that high-income consumers spend disproportionately more than low- and middle-income ones, but all households have generally followed the same economic cycle.

More recently, however, we see the economy fragmenting into different paths. Better off Americans—the upper end of the K—continue to experience booming times, while those worse off—lower end of the K—face deteriorating conditions.

The implications are complex. Consumer sentiment has weakened as a predictor of aggregate consumption. For businesses, the “average” growth outlook may be doing a poor job of representing end-customers’ circumstances, understating the strength of the high-end consumer and overstating the strength of the average American. For policymakers, the needs of different groups from monetary and fiscal policies are diverging.

As part of a series looking more deeply into the K-shaped trend, we begin by analyzing the Federal Reserve’s Distributional Financial Accounts alongside our own estimates for distributional flows from the Fed Financial Accounts, using the Fed’s Survey of Consumer Finances. Here are our key takeaways.

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Top earners and Baby Boomers account for the majority of consumer spending

Our analysis of financial account flows suggests the market is overestimating consumer resilience by looking at aggregate data.

The apparent strength is an illusion, driven primarily by the top 10-20% of households who, as we show below, account for the bulk of personal outlays. But the post-pandemic spending boom isn’t just about balance sheet strength—it’s about who has liquid, income generating assets and who is willing to deploy them.

The top cohort has disproportionately benefitted from post-pandemic monetary policy, accumulating trillions in liquid, income generating assets¹ since 2020. The top 10% poured roughly $30 trillion into these assets since 2020—six times more than any other group, where cumulative flows peaked near $5 trillion. These liquid assets have appreciated substantially for top earners, who continue to hold a disproportionate share.

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Household balance sheets improved significantly over the past decade

The Fed’s Distributional Financial Accounts underscore the resilience of American households following the Great Financial Crisis (GFC). While the Covid pandemic put this trend on pause in 2020, unprecedented government stimulus from pandemic response policies helped usher in a new era of asset appreciation.

Flush with cash, lower income and indebted households experienced forced savings followed by notable wage growth, significantly improving the leverage ratios of their balance sheets. This would suggest broad-based consumer strength coming out of the pandemic, consistent with the rebound in consumer confidence in 2021.

But, heading into 2025, consumer confidence continues to drift lower despite generally strong GDP growth and a historically low unemployment rate.

Many households are struggling just few years after historic stimulus

Aggregate balance sheet strength masks the reality facing the broad population.

The bottom 80% are no longer dissaving as they were in 2022 and 2023, but they’re not materially saving either. We estimate the bottom 80% are clustered in a tight band between -5% and 5% personal saving rates.² Millennials exemplify this constraint: they are building wealth faster than previous generations at comparable ages but remain “house poor.”

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Since 2020, Millennials’ cumulative borrowing has grown to 160% of liquid asset accumulation, far outpacing Gen X, which has remained near parity at 100%. Baby Boomers—net savers as they are below the parity threshold—underscore Millennials’ more constrained capacity for discretionary spending.

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At the same time, accessing wealth stores will be challenging. Millennial equity in primary residences comprises of 59% of their generation’s net worth, compared to just under 24% for Baby Boomers. Millennials’ slightly elevated savings rates near 5% may even reflect a drag on near-term consumption as they prioritize wealth building over spending. The acceleration of indebtedness applies across most income deciles.

The bottom leg of the K is feeling lousy

The bottom 10% of American households accumulated just about $38,000 per household in readily accessible liquid financial assets³ since the pandemic began.

The bottom 80% average only about $76,000 per household. This represents their entire liquid cushion above pre-pandemic levels that could theoretically be liquidated for consumption. We estimate at current spending patterns, these post-pandemic liquid asset accumulations could be exhausted within 12-18 months under adverse conditions.

Hence, while total personal outlays appear to be rising, this growth is dangerously reliant on a narrow segment of wealthy, high-income households. Aggregate demand under these circumstances is more fragile than it appears and is highly vulnerable to any shock.

Downside risks could rapidly expose the fragility of the consumer base

Total personal outlays continue to rise, but downside risks loom. The bottom 80% of households—already stretched by cumulative 27% price increases since 2019—have minimal capacity to absorb further cost pressures without materially curtailing consumption, taking on additional debt, or drawing down assets.

As we head into 2026, we expect that consumer prices will continue to rise, and outpace wage growth, eroding real purchasing power. Historical evidence suggests tariff pass-through rates to consumer prices range from 50-100%, depending on the sector. The most recent September CPI report shows this dynamic emerging most acutely in trade-exposed goods including apparel, motor vehicle parts, and personal care products.

Without wage growth to offset rising costs (lower-end earners are already experiencing below average wage growth), lower-income households face challenges: dissave by drawing down buffers, substitute to lower-quality goods, or cut discretionary spending.

Still, a stock market correction presents a greater risk to growth in our view, given the concentration of spending power among top income households. The momentum currently driven by this narrow segment masks an economy vulnerable to disruption in the behavior of high-income consumers, or exogenous shocks hitting the constrained majority. When financial assets decline in value, high earners’ non-labor income shrinks (i.e., dividend and interest income), and the magnitude of their spending can decline substantially.

The top 20% of households hold approximately 87% of all directly and indirectly held corporate equities. A significant market correction would, therefore, strike precisely where spending power is concentrated.

Unlike the GFC when falling home values impacted the broad middle class who drove consumption, today’s equity-heavy wealth concentration means the spending engine itself is directly exposed to market volatility.

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About the Authors

Mike Reid is a Senior U.S. Economist at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is an economist and a member of the macroeconomic analysis group. She is responsible for examining key economic trends including consumer spending, labour markets, GDP, and inflation.

Imri Haggin is an economist at RBC Capital Markets, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.

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