When “buy now, pay later” financing first gained traction, it was largely a way to finance discretionary purchases. Today, BNPL is being extended to rent.
When installment financing migrates from discretionary purchases to basic housing, it makes a mathematical reality visible: the middle-class margin has collapsed. Yet, when the Federal Reserve recently raised interest rates, lifting the federal funds target range by 25 basis points to 3.75% to 4%, with the 10-year Treasury yield topping 5%, policymakers painted a very different picture. Citing resilient domestic spending, strong productivity growth, and robust capital investment, the Fed described economic activity as expanding at a solid pace.
The Fed’s diagnosis is not wrong. It is incomplete.
What the aggregate hides
Aggregate resilience tells us how much America is spending. It does not tell us who still has the capacity to spend. The Fed is applying a single economic tool to an economy that is now operating on two completely different balance sheets.
The top 20% of U.S. households now account for approximately 60% of consumer spending, while the middle-class wage-price margin has collapsed by 115% from its prewar baseline, turning negative.
The same imbalance shows up in who captures the economy’s gains. Labor’s share of nonfarm business output, the portion of economic output that flows back to workers in pay and benefits, fell to 52.8% in the second quarter, the lowest level on record. Put simply, workers are producing economic value while receiving a smaller share of its yield.
Meanwhile, U.S. household wealth rose a record $12.8 trillion in the second quarter, including $10.7 trillion in gains from equities. But those gains were not broadly shared. The wealthiest 10% of households hold more than 87% of equities, meaning the households already owning most of the market were positioned to capture most of those gains.
GDP can be resilient while household resilience grows increasingly concentrated.
That distinction is critical when the Fed raises rates.
One rate, two incidences
A rate increase is universal. Its incidence is not.
For a household with significant financial assets and savings, higher rates can mean better returns on cash and higher yields on new fixed income investments. For a household operating at a negative margin, the same rate increase is an expense. It shows up in credit cards, auto financing and other borrowing. There is no investment portfolio to absorb the shock.
The sheer scale of this installment financing makes the divide visible. Federal Reserve researchers estimate that major providers originated nearly $160 billion in this credit last year. The share of users financing groceries has doubled in the past two years as negative-margin consumers borrow to finance their milk and eggs.
One household responds to tightening by changing how it saves. Another borrows to cover housing and food.
That is not simply a distributional issue. It is a monetary policy issue. Aggregate data can obscure radically different labor market realities, and monetary policy calibrated only to the aggregate can miss the productive capacity sitting beneath it.
Expanding the productive base
Because consumer spending represents overtwo-thirds of the U.S. economy, this distributional divide is a mathematical vulnerability. Extract purchasing power from households with negative margins, and the effects travel: lower consumption, lower business revenue, and weaker growth.
America cannot solve a structural economic imbalance by deepening a household margin problem. Suppressing demand through higher borrowing costs does not fix a fractured supply base. Instead of squeezing an already depleted middle class to balance the economy, policymakers must expand the productive base.
That requires optimizing human capacity, which represents a $3.1 trillion economic opportunity in the U.S. This is economic capacity currently lost to suppressing yield across the labor market. By increasing workforce participation and removing systemic friction, we can expand potential output.
A larger productive economy allows for growth without generating demand-driven inflation. It organically restores the middle-class margin so everyday consumers do not have to rely on installment financing to cover daily living expenses.
The Fed has one interest rate, but until our policies bridge the reality of our two economies, we cannot borrow or hike our way to stability. Real economic resilience requires unlocking the capacity we are already leaving on the table.
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