This burrito is everything you need to know about America’s economy

Fact 1: America’s economy and stock market keep growing, buoyed by robust consumer spending and AI mega-growth.

Fact 2: Hiring is at a standstill, inflation is rising, loan defaults are abundant and Americans give this economy a near-record-low rating.

Confused? To understand how both of those things can be true, consider the burrito.

Chipotle on Wednesday reported miserable earnings and cut its sales-growth forecast for the third-straight quarter. The culprit: Young and lower-income consumers (Chipotle’s core customers) are cutting back on their spending, and they’re starting to skip the guac.

Chipotle CEO Scott Boatwright on the company’s earnings call: “We’re not losing them to the competition; we’re losing them to grocery and food at home. And so, that consumer is under pressure. It is one of our core consumer cohorts. And so, they feel the pinch and we feel the pullback from them as well.”

Boatwright said the company’s customer surveys showed many believed Chipotle was no longer affordable. People in households that bring in less than $100,000 a year drive about 40% of Chipotle’s sales.

Another problem: 25- to 34-year-olds, who make up 25% of Chipotle’s sales, “pulled back meaningfully.”

“I think there’s a component of a more discerning consumer, and I think most of it – the majority of it – is this massive pullback,” Boatwright said. “That household under $100,000 a year is pulling back.”

At the same time, some consumers are spending like they’re from a completely different universe.

Crocs CEO Andrew Rees noted that bifurcation on a call with analysts Thursday: “There is a portion of our North American consumers that are highly affluent. They’re buying Crocs, they’re buying other high-end brands and they are in great financial shape,” Rees said. “But there is a large portion of consumers who are nervous, they are in less-good financial shape and are being super cautious about their spending and certainly spending closer to need.”

Or take Coke (to wash down your burrito). Coca-Cola’s Chief Operating Officer Henrique Braun on a call last week with analysts said Coke’s earnings were boosted by strong demand for the company’s premium brands: Topo Chico, Smartwater and Fairlife.

But Braun highlighted a successful two-pronged corporate strategy, noting the tough environment for lower-income consumers hasn’t changed – despite the growth in its high-end brands. That’s why Coke is also cutting sizes (and prices) on the lower end to drive sales – to “really tackle not only affordability but premiumization as well,” Braun said.

“When we look from a consumer point of view, we continue to see divergency in spending between the income groups,” Braun said. “The pressure on middle- and low-end income consumers is still there.”

The ‘K-shaped’ economy

Economists call that phenomenon a “K-shaped” economy: Wealthier people are spending like nothing’s wrong. Lower-income people are making significant changes to preserve their finances.

Federal Reserve Chair Jerome Powell addressed that concept Wednesday in a media briefing.

“On the K-shaped economy … if you listen to the earnings calls or the reports of big public consumer-facing companies, many, many of them are saying there is a bifurcated economy there and that consumers at the lower end are struggling and buying less and shifting to lower-cost products,” Powell said. “But at the top, people are spending, at the higher income and wealth.”

It’s not all anecdotal: Last month, Moody’s Analytics reported that the country’s top earners are accounting for a growing share of overall spending.

What’s causing that divide?

Wealthier Americans are generally invested in the surging stock market, which has gained 17% this year. They have more job security than lower-income workers. And they own homes, which keep appreciating in the tight-supply market.

By contrast, less-affluent Americans are living paycheck to paycheck, and their wages aren’t keeping up with inflation. If they lose their jobs, the cruddy labor market is preventing them from finding a new one – the number of Americans on unemployment insurance for multiple weeks recently surged to a four-year high. And rents, until recently, had jumped as demand for rentals explodes – because so few homes have been on the market.

What happens next?

A K-shaped economy can be difficult to repair. America’s economy has been increasingly bifurcated for quite some time – with the exception of a few years following the pandemic.

During those post-pandemic years, government support for workers gave lower-income Americans a leg up. For the first time in a generation, the wealth gap narrowed. Wages outpaced inflation, especially for lower-income workers. Interest rates were low, and homeowners refinanced like crazy to lock in historically low mortgage costs.

But it was short-lived. The sugar rush of government stimulus checks wore off, and the economy resumed its previous trajectory. Mortgage rates rose to multi-decade highs. And, concerning for people who are getting left behind, the US government began pushing safety-net programs in the opposite direction, reducing benefits and increasing hurdles to access support.

Those actions could widen that “K” in the future. Wider than you have to open your mouth to eat a Chipotle burrito.