BUSINESS

Last Friday, the U.S. economy got the best news it had seen in months with the release of the latest jobs report. Still, there are growing signs that the overall health of the economy is faltering, with only the rich benefiting while the poor continue to struggle. This kind of economic recovery is known as a K-shaped economy, where people in the upper arm of the ‘k’ see their wealth increase while those in the bottom half go in the other direction. According to a new Bank of America note, the clearest sign that the recovery is bifurcated is an unexpected increase in consumer spending on luxury items in March.It doesn’t take a Bank of America analyst to know that gas prices are rising sharply across America as the country begins the second month of its war with Iran. As of April 7, the average price for a gallon of gas is $4.14, well ahead of the $3.26 from a year ago and even the $3.41 from a month ago, according to AAA. The U.S. economy was relatively healthy before the start of the war on Feb. 28, per Axios. Yet 10-year bond yields have suggested for some time that inflation isn’t going anywhere soon, despite years of political hand-wringing over the issue.Now that the war is underway, experts expect energy prices to be just one of the casualties, as disruptions to fertilizer supply threaten food prices (the Gulf region provides nearly half of the world’s seaborne urea and 30% of global ammonia demand).Aluminum shortages (20% from Gulf states) threaten everything from aerospace to automotive manufacturing to construction to consumer electronics, according to the Atlantic Council.But somehow, amid all of this economic madness, American spending on luxury items is experiencing a resurgence it hasn’t seen in years.

Luxury spending is skyrocketing in the U.S.Cheng Xin on Getty Images

U.S. luxury spending has exploded since JanuaryLuxury spending has been one of the few Covid casualties that has stubbornly lagged a broader recovery in other consumer items. In fact, according to BofA, luxury spending had been down for over three years before it started showing signs of recovery. “US luxury spending had been a laggard in the discretionary spending arena for a significant period of time: prior to 2025 Q4, it had shown 13 consecutive quarters of negative YoY growth,” BofA analyst Ashley Wallace said in a note seen by TheStreet. “But there has been better news of late. Growth turned positive in 2025 Q4 and has accelerated further in 2026. Monthly data through March 21 shows the YoY growth rate at around 12%.”Q4 2025 was the first positive quarter in years, as spending grew about 1% year over year. Q1 2026 saw spending explode, increasing nearly 10%.Related: Rising gas prices force Americans to make unexpected changesAll income groups reported increased luxury spending in the period, but of course, those in higher income brackets spent more on those items. “All income cohorts are showing a recovery in luxury spending in 2026, although the strongest growth is among higher-income households – unsurprising given the broader ‘K’ shape we’re seeing in consumer spending,” according to BofA. “”One possible driver of the recovery is the fact that luxury spending as a percentage of overall US discretionary spending is currently relatively low, suggesting some catch-up activity. The fall-out from the conflict in the Middle East warrants close attention going forward, but for now the data looks solid.”Increased worker productivity helps fuel K-shaped economyAs the average American worker struggles, big corporations benefit from some of the highest worker productivity in years.According to Bank of America, since the Covid pandemic, national accounts data have shown a sustained increase in productivity, which is easily reflected in rising corporate profits.However, at the same time corporate profits are rising, labor income has steadily fallen as a share of U.S. GDP, creating the K shape that could define the U.S. economy for the foreseeable future.“For now, higher profits relative to wages are yet another driver of a K-shaped economy, as higher-income consumers tend to be more exposed,” according to BofA Securities.“Measured labor productivity (that is, output per hour) continues improving since the end of the pandemic and is mostly concentrated in the services sectors rather than manufacturing. Interestingly, real labor income is not growing at the same pace,” according to BofA.“In other words, productivity gains translate into higher corporate profits. This dynamic implies a higher share of the GDP pie going into corporate profits relative to labor income.”Related: Rising corporate profits, falling wages drive K-shaped economy