Does the K-shaped economy theory even make sense?

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Good morning. The very last American penny was minted yesterday. Its fatal sin: costing nearly 4 cents to make. Absence may make the (consumer’s) heart grow fonder, though. Businesses will eventually have to round up prices to the nearest nickel, which the Richmond Fed estimates could cost shoppers about $6mn per year. Penny for your thoughts: unhedged@ft.com.

K-shaped logic

Yesterday we argued that all the talk about a K-shaped economy had been overdone. America is very unequal in wealth and income. But there just isn’t much evidence to suggest that there has been a recent increase in inequality big enough to explain the stratification of consumer behaviour — the well-to-do spending merrily as the working class scrapes by — that companies have reported. Explaining other odd discontinuities in the economic picture (such as high GDP growth combined with low job creation) by reference to inequality doesn’t fit the evidence, either. 

A more compelling, if quite speculative, theory: the rapid cooling of the job market (less hiring and lower wage growth even as unemployment has stayed low) has led working people to reassess their prospects for the future and change their spending patterns accordingly.

As it happens, Dominic White of Absolute Strategy Research wrote on the same theme yesterday, and in a similar spirit. But he made some points that I missed. He focused on rebutting widely publicised claims about consumer spending — that the top 10 per cent of earners now account for almost half of all consumer spending. This is “almost certainly wrong”, White wrote. Estimates from the Bureau of Economic Analysis of spending by income cohort have been very stable over time, with the top slice not taking anything like half. And, according to the Congressional Budget Office estimates, the top 10 per cent take home about 37 per cent of income. We know that high earners save more of their income than low earners. So arguing that they have suddenly begun to account for a share of spending greater than their share of income seems odd. 

That point about the wealthy’s lower propensity to spend incremental wealth highlights a general problem with the K-narrative. If the view is that the rich are taking a bigger and bigger share of national wealth and income, that implies lower economic growth, because the wealthy tend to save new money that comes in (how much can a person consume, after all?). “Any concentration of wealth among higher-income households argues for slower, not faster growth,” White argues. So if the economy is K-shaped, why is GDP growth this quarter expected to come in well over 2 per cent?

More on computer memory makers

In response to our recent piece on memory stocks, we received a very interesting note from a reader (who wishes to remain anonymous). He spent a long career in computer hardware at IBM and elsewhere, and neatly summed up why the memory business (like many other hardware businesses) is so cyclical. It is mostly a commodity business, but not entirely:

It’s a commodity market even at the high end mitigated by the limited number of companies making the latest, fastest, highest-capacity components. During (and before) the dotcom era, there were two to three times the number of storage and memory suppliers, but as manufacturing retooling to go faster, denser and physically smaller became the mantra, the ability to finance a ten-year investment fell to those who could also satisfy the commodity market . . . [booms and busts are] the effect of not being able to invest for the long term in the science and engineering to build two generations [into the] future . . . This is why IBM got out of [the] storage manufacturing business.

So it’s a commodity business where prices are always under long-term pressure, but where there is also pressure to invest in innovation (faster, denser, smaller!). That means weak players get picked off and there is never quite enough new capacity. Hence the swings in prices. The question now: does high demand, driven directly and indirectly by AI, mean we have entered a price supercycle that will drive the shares of the memory makers ever higher? “Maybe, but I would not bet my 401k on it,” our correspondent writes.

Dec Mullarkey of SLC Management wrote to alert me to an aspect of the memory story I didn’t know. One particular kind of memory, known as HBM (high bandwidth memory) is particularly important for AI applications. The Korean company SK Hynix, which I did not mention in my earlier piece, is the leader here. Among the memory pure plays (that is, excluding Samsung), Micron is the second-biggest HBM competitor. This shows up in the share prices — with SK Hynix shooting to even wilder highs, and Micron at its heels:

In short, the memory cycle is an interesting way to observe, speculate about, or bet on the endurance of the AI boom. The question is, is the recent revenue growth slowdown in the memory industry about to give way to another boom? Here’s the chart of the cycle from the recent letter, updated to include SK Hynix:

Some analysts think so. Shawn Kim and his team at Morgan Stanley recently published a note called “Memory Supercycle — Rising AI Tide Lifting All Boats”. “The April trough marked the start of a new tech cycle driven by much stronger AI growth. We believe this will cause a supply-demand mismatch in 2026,” Kim writes. Unhedged will be following the story closely.

One good read

Trust.

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