Our Rugged Macroeconomic Terrain: K-Shapes, Peaks, and Valleys

Interest Rates, Credit Access, and Inflation

Despite the Federal Reserve’s recent rate cuts, long-term borrowing costs remain elevated compared to the last two decades. Real estate, construction, and other rate-sensitive segments are likely to continue to face pressures.

Some economists have emphasized that the US is showing evidence of being a K-shaped economy, wherein different groups experience economic growth at sharply different rates. In a K-shaped economy, there are relative winners (the upward stroke of the “K”) while others decline or stagnate (the downward stroke). The K-shaped economy is evident in a variety of consumer metrics. For example, the latest Senior Loan Officer Opinion Survey shows loan demand strengthening among large firms but stagnating among smaller ones. With respect to household lending, banks are similarly selective, approving more credit card applications from prime borrowers while tightening access for subprime households.

Meanwhile, inflationary pressures remain uneven across categories. Finished core goods producer prices are accelerating mildly, running 2.5% above year-ago levels in the third quarter. Food and services producer prices are rising, but the rate of ascent is generally easing, with prices in these categories coming in at 3.8% and 3.1% above year-ago levels, respectively. For firms aiming to protect margins, this uneven pricing environment will require careful monitoring of input costs and the deployment of more flexible pricing strategies. We expect overall Producer Prices to rise through at least 2026 and likely beyond, though there will be significantly different outcomes in pricing based on market.

Upside Factors to Consider (Peaks)

Acceleration in US Manufacturing New Orders could translate into stronger-than-predicted ascent in US Industrial Production, especially if we see a trend of firms deciding to move forward on projects they temporarily shelved during 2024–25 due to uncertainty. Firms may benefit from increasing communication with their customers and supply chain partners and from using dynamic planning, AI, or other software to better zero in on the right pace of expansion this cycle.

Labor markets also remain a source of support. Although it is softening at the margins, the labor market is still generally solid. Wage pressures may ease in the short term but are likely to reassert themselves given demographic trends. A resilient labor market continues to underpin consumer spending and business activity even as other indicators soften.

Downside Risks Businesses Need to Watch (Valleys)

Low oil prices remain a mixed signal. While they offer near-term cost relief, persistently low price points are hurting the US oil industry and complicating pricing strategies. Companies should identify which energy indicators best match their cost structure and treat current price levels as temporary rather than a strategic baseline. Quarterly US Final Demand Energy Producer Prices — a broader measure of energy prices — are significantly below the mid-2022 peak (down 21.1%), but they have started inching upward.

Tariff uncertainty continues to elevate risk. Ongoing policy revisions and cost pass-through already showing up in producer prices make supply-chain planning more difficult. Import-reliant firms may experience heightened margin volatility as tariff effects unfold across categories.

The K-shaped nature of this cycle adds further complexity. Higher-income consumers and stronger industries such as the high-tech sector are maintaining spending capacity, while lower-income households and more vulnerable industries — primarily legacy manufacturing segments like fabricated metals and machinery — show strain from inflation and elevated rates. This divergence is resulting in uneven demand patterns that make forecasting for businesses serving broad markets more challenging.

Key Takeaways

The road ahead is full of upsides and downsides, and neither should be viewed in isolation. Manufacturing momentum and labor resilience provide meaningful support for macroeconomic rise ahead. Yet policy uncertainty, tight financial conditions for some, uneven consumer dynamics, and long-term structural risks present real challenges. For business leaders, the key is to plan with both sets of realities in mind: look to leverage opportunities while insulating your business from the riskier, weaker parts of the economy. Success in this business cycle will require a detailed and nuanced approach.

Consider whether lower oil prices will benefit or hurt your business while keeping in mind that broader energy costs are ticking up. Scrutinize your supply chain to better anticipate incoming input cost pressures stemming from tariffs or other supply-side headwinds. Know where your business stands relative to the K-shaped economy to ensure that your financial projections reflect the likelihood of divergent spending patterns by income. If you need help building out a forecast, reach out to us.