By Alicia Wallace, CNN

Falcon Heights, Minnesota (CNN) — Consumer spending is a crucial part of the US economy, accounting for about two-thirds of its growth. And judging from retail sales data released earlier this week, that economic engine appears to be running smoothly. Sales were up a strong 0.6% in August, a month when spending was expected to be somewhat lackluster.

At face value, this latest data appears to be yet another testament to the sheer “resilience” of the US consumer, a storyline that’s become all too familiar these past several years: that ‘despite (insert economic concern here), the US consumer is doing just fine and keeping the economy chugging along.’

However, the solid gains are masking a deepening inequality among US households’ economic experiences, a “K-shaped economy,” where a small share of high-wealth Americans is seeing continued gains while a larger share of middle- and lower-income households is experiencing increased strain.

“The economy’s prospects are tethered to the fortunes and spending of the well-to-do,” Mark Zandi, chief economist at Moody’s Analytics, told CNN. “Those in the top 20% of the income distribution are driving the economic train.”

And that gap is widening to a historic extent, Moody’s Analytics data shows. As of June 30, the top 20% of earners accounted for more than 63% of all spending, and the top 10% accounted for more than 49% — both the highest on record, according to data that goes back to 1989. In 2019, during the comparable period, those shares were 59.2% and 44.6%, respectively.

“If [the top-earners] turn more cautious in their spending, for whatever reason, the economy will suffer a recession,” Zandi said. That could happen if there were a significant correction in stock prices, he said, since much of the wealth that fuels spending by those “well-to-do” individuals is tied to the robust financial markets.

Hoping for the best

The wealthiest households accounting for an even greater share of US spending growth is causing upward pressure on inflation and spurring speculative bets that could foment asset bubbles. That could make the United States more vulnerable to a potential recession in the process, but it also risks setting back some Americans for years to come, economists tell CNN.

“The business cycle is always super depressing when we think about the different parts of the income distribution, because the lowest decile … in every single recession, they fall further and further behind,” said Tyler Schipper, an associate professor of economics and data analytics at the University of St. Thomas, in St. Paul, Minnesota.

The widening spending inequality is happening at a time when the US economy is slowing, inflation is heating up and the job market is getting shakier.

For some people, like Minnesota resident Calyssa Hall, money is tight, and especially so since the pandemic.

“It’s been hard to bounce back totally,” Hall told CNN. “But we are believing that all the good things are coming. I truly believe that I’m going to get back to the point of abundance and non-panic — not spending like crazy but just being able to go and not worry about money.”

The rising cost of living was top of mind as Hall and her friend visited the Minnesota State Fair in August. A venture that used to include purchases of artisan-made goods and a selection of different tastes and eats has been whittled down to a couple of food items.

To be fair, most state fair items have become much pricier over the past year. According to a price index (the fittingly named On-The-Stick Index) developed by economist Schipper and his University of St. Thomas students, fair prices rose by 7.7% from the year before — more than double overall inflation.

When tracking prices at the Minnesota State Fair this year, Schipper noticed that attendance was below average despite incredibly favorable weather. He attributed that to the fact that “consumer sentiment is lower, and the State Fair tends to be a place where you’re maybe not as cost-conscious.” One way to avoid paying higher prices is that some “just don’t go to the fair at all,” he said.

Spending power being sapped away

President Donald Trump’s widespread and steep tariffs on US imports have weighed on consumer demand, business investment and hiring, said Justin Begley, an economist at Moody’s Analytics.

Still, on an aggregate basis, US households appear to be managing their debt and delinquencies haven’t escalated to concerning levels, Moody’s Analytics’ US Household Debt report for August showed.

However, for lower- and middle-income households, that credit picture is looking less stable, according to a Moody’s Analytics analysis of delinquencies by credit score (which is the closest proxy for income).

While overall delinquency rates are hovering around their pre-pandemic levels, the percentage of balances 30 days or more past due for households with sub-660 credit scores rose to 9.06% in July, the highest share since February 2016.

Additionally, credit scores are dropping at the fastest pace since the Great Recession, according to new data released this week by credit scoring company FICO.

Overall wage growth is slowing, and the pandemic era trends where pay gains were faster for lower-income workers have reversed themselves and are now faster for higher earners.

At the same time, price stressors have been particularly acute for low- and middle-income households, Schipper said.

“Economists have long said that tariffs are regressive; they function as a consumption tax, and consumption taxes are more stressful for households that are spending more of their budgets on goods and services,” he said. “We’re also seeing middle-income households actually shopping at places like dollar stores and Walmart.”

In Fishers, Indiana, Scott Goodwin’s family recently started buying groceries at a different store.

“We’ve changed grocery stores from the more, I hate to say, one of the more nice grocery stores to shop at locally; we used to go there for five to 10 years,” he told CNN. “And now, we went to another chain. My wife thought we can save more money by going to another store, so we’re doing that.”

The Goodwins have long taken a conservative approach to spending — they typically don’t take trips, and instead they use the money to take care of bills, including student loan payments.

“The economy is always changing, it’s changing now. Do I have as much spending power today as I did five years ago? Probably not,” he said. “We’re conscious of that. My wife and I pull back when we need to.”

But recently, they’ve pulled back more on what they spend on food and leisure, including cutting out concerts this year.

“Is that because I’m sick, or is that because of the economy? It could be a combination of both,” said Goodwin, who was born with polycystic kidney disease, a rare genetic disease that has now progressed to Stage 5, or kidney failure.

More medical costs are on the horizon for Goodwin, as he’ll start dialysis soon and desperately hopes for a transplant.

“There’s a lot looming for me, medical bills being one of them,” he said.

A quarter-point drop in the bucket

Inflation has heated up in recent months, in part because of tariff-related effects but also higher services prices, particularly for travel-related sectors.

“Affluent households are still willing to pay for the front of the bus, and they’re also willing to pay up, while a lot of households are curbing their discretionary spending,” Diane Swonk, chief economist at KPMG, told CNN. “You have this pocket of affluent consumers holding up service sector inflation in a way that you wouldn’t normally have.”

Plus, the widening gap is making overall spending weaker, she said.

“Inequality is also important, because lower- and middle-income households, any dollar they earn or that’s put in their pocket, they’re more likely to spend than a high-income household,” she said. “When you have higher inequality, overall consumer spending is weaker as well. And so, it’s not just a bifurcation, it actually dampens overall spending and inequality.”

She added: “It’s like the worst of all worlds, in some ways, for the [Federal Reserve].”

On Wednesday, the Fed cut rates for the first time this year, lowering its benchmark interest rate by a quarter point. Monetary policy acts with a lag, and the size of the cut isn’t expected to be a salve for the K-shaped economy-related ills. However, it could bring some relief to certain households, Schipper said.

“I think a household that’s struggling with credit card debt and is actively trying to get rid of it — every little bit helps,” he said. “There will be some households, potentially, that it might make sense within the next six months to refinance their mortgages, and that can be a big help.”

But it’s likely not generating huge sighs of relief that the worst is over, he said.

“It’s just a little bit less of a struggle,” he said.

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