How the K-Shaped Economy Is Reshaping Consumer Spending

As we move into 2026, we expect the K-shaped economy to continue as AI adoption generates a reduction in demand for labor, faster than the economy can create new jobs.  Named for the split recovery Americans experienced coming out of Covid, the K-shaped economy is one in which the wealthiest Americans drive growth in consumer spending, while everyone else suffers under rising inflation, slower wage growth, and higher unemployment.  Well-off Americans with real estate and investment portfolios continued to prosper in 2025 as rising home prices and financial markets fueled wealth accumulation, while younger Americans – those saving to buy a home and one-day retire – saw these goals slip further from reach.  The result is a bifurcation of the market, with one set of consumers focused on luxury and the other stretching every dollar.  In this environment, small businesses are struggling to identify their core customer and position their offerings appropriately.

While they adapt to the changing world of technology, restaurant owners are also working to position themselves in the emerging economy.  The restaurant industry experienced top-line growth in 2025, despite rising unemployment as the high-end of the market was supported by robust consumer spending from high income households, and quick service restaurants maintained a steady clientele of lower wage earners seeking value.  However, most restaurants saw expenses rise faster than they could pass on costs to customers, creating margin compression.  A high-end restaurant today can expect to earn between five- and ten-percent profit margins, with ~35 percent of revenue going to cover labor expenses.  We expect labor costs to continue to rise in 2026, as the crackdown on undocumented immigration weighs on the industry, further reducing margins for restaurants who are trying to keep menu prices as affordable as possible.

We expect the current tax and tariff structure to largely remain in place, and we expect continued economic stimulus in the form of wide budget deficits.  As a result, we see the economy growing in 2026, driven by efficiency gains, technology investment, and economic stimulus, but expect growth in consumer spending to be subdued as unemployment rises.  Given this dichotomy, small businesses face a difficult balancing act of serving a bifurcated customer base while investing in new technologies and navigating a turbulent economy.

Fortunately, we expect the wealthy to continue spending freely in 2026 and everyone else to focus their limited discretionary spending on value providers.  Keeping prices in line with consumer expectations will be a challenge, especially with rising labor costs resulting from a crackdown on undocumented immigration.  We expect restaurants to continue investing in AI and automation technologies to reduce their cost of labor and overhead, but given the manual nature of the restaurant business, these technologies will have less of an impact on margin expansion than in other industries. 

 Factors to Watch in 2026

Inflation, Employment and Productivity: The Federal Reserve’s interest rate policy balances its desire to maintain a robust economy and full employment with its desire to limit inflation.  The Fed cut interest rates three times for a total of 75 bps in 2025, on top of three cuts for 100 bps in 2024.  These cuts do not appear to have stoked a meaningful change in inflation to date, but as tariffs become permanent and the government continues to spend trillions more than it collects in revenue, the threat of inflation remains constant.

One of the greatest weapons against inflation will be productivity growth.  Today business leaders and economic experts seem to be pinning their hopes on new AI technologies to usher in an age of automation and rapid productivity growth.  History has proven that new technologies take years to work their way into business processes, so we do not expect a silver bullet cure for inflationary pressure.  However, we do believe in the power of new AI technologies to streamline work and eliminate both blue and white-collar jobs.  In fact, we believe we are at the beginning of a workforce transformation that will lead to the elimination of many existing jobs and hopefully the creation of many new roles as the economy evolves.

The unemployment rate rose in 2025 from four percent in January to 4.6 percent in November and we expect it to continue growing in 2026, despite a reduction in the immigrant labor pool.  Unemployment is especially high for younger Americans with less experience, and we see entry level jobs being the first jobs being automated away by AI.  We can only hope that the dynamism of the US economy is able to create new, inspiring roles for those being displaced by automation.

Tariff Policy and the Political Environment: The Trump Administration entered office in January 2025 determined to deliver on its promise of lower taxes, less regulation, smaller government, higher tariffs, tighter immigration, and a reduction in the undocumented population.  Objectively speaking, it has delivered on most of these goals.  However, it remains to be seen whether these policies will deliver the growth, low inflation, and improved employment prospects for the middle class that were promised along with these policies.  Early indications are mixed.

What we do believe is that the tariff increases of 2025 are here to stay.  We do not expect the Supreme Court to rule against the Administration’s ability to impose tariffs in a way that would meaningfully reduce their impact going forward or cause the money collected to date to be repaid.  We expect current economic policy to remain in place through the swearing in of a new Congress in January 2027, with a bend toward higher tariffs and lower interest rates.  The combination of these policies has the potential to drive inflation higher while the unemployment rate continues to rise.  

We expect 2026 to be a year of rapid technological advancement that places pressure on small business owners to combat higher costs and lower margins with the adoption of new technology.  Small businesses will also need to keep a laser focus on the needs of their customer base.  Understanding which arm of the K-shaped economy a business is serving will be essential to success. 

To navigate changes in government policy, technology, and consumer spending, small businesses will need to be nimble and have access to flexible financing solutions.  This means determining what financing they are likely to need and developing relationships with a variety of financial services providers.  While many community banks have been consolidated into larger regional institutions, and others have scaled back their exposure to commercial credits, there are many non-bank small business lenders that are ready to fill the funding gap.  Despite considerable uncertainty, we expect 2026 to be a prosperous and exciting year for small business owners and look forward to providing growth capital to this community, the most critical growth engine of the American economy.