Why the bifurcated economy defies recession calls
For the past three years, economists, analysts, and CEOs have played a familiar game: “Recession next year.” Each January begins with strong conviction that the data will confirm it, only for consensus to shift by late fall: “Definitely next year.” As Nobel laureate Paul Samuelson once said, “nine of the last five recessions have been predicted by economists.” If you call for a downturn long enough, you’ll eventually be right. But as of now, the odds of a broad-based, traditional economic contraction remain surprisingly low.
That said, the atmosphere entering the latter half of the year feels distinctly different. We began with a narrative of an extraordinarily resilient U.S. economy, where the labor market held firm despite the Federal Reserve’s fastest hiking cycle since 1982. But now, cracks are emerging. Even the Fed has acknowledged that the labor market is at a near standstill.
To understand the present, we must first recognize that the idea of a singular, monolithic “U.S. economy” is outdated. We are now living in a bifurcated economy.
Historically, economic cycles were relatively uniform. Improvements in GDP growth, employment, and consumer sentiment typically signaled better conditions for most households. But the post-COVID era shattered that synchronicity, giving rise to what economists now call a K-shaped recovery, a divergence where one segment of the economy rebounds or thrives, while another continues to stagnate or decline.
The most visible split is between high-income and low-to-middle-income Americans. High-income households have been the primary beneficiaries of the current financial landscape. They’ve earned more on savings thanks to elevated interest rates and seen substantial wealth gains from surging stock and housing markets. In contrast, low- and middle-income households have missed out on these asset gains and have borne the full brunt of persistent inflation, especially in non-discretionary categories like rent and food. As pandemic-era stimulus dried up, many in this group have depleted their savings and increasingly relied on credit to maintain consumption.
This divergence is not anecdotal, it’s well-documented:
- Labor market divergence: A 2021 working paper from the U.S. Bureau of Labor Statistics found that high-wage, remote-capable jobs rebounded quickly, while sectors like hospitality and leisure, which employ lower-income workers, struggled and faced lasting instability.
- Sectoral disparity: Industries such as technology, finance, and professional services have thrived, while high-contact sectors reliant on physical presence have lagged. Economic research describes this as a form of “creative destruction” accelerated by the pandemic.
- Consumption polarization: A recent Moody’s Analytics analysis found that the top 10% of U.S. households, those earning roughly $250,000 or more annually, now account for nearly 50% of all consumer spending, the highest share since records began in 1989.
This means aggregate consumption data can be structurally misleading. When high-income households continue to spend lavishly on luxury goods, high-end travel, and large-ticket investments, it can mask the financial distress experienced by the bottom 90%.
So how can the U.S. economy be tracking toward a healthy 3.9% growth rate in Q3, according to the Atlanta Fed’s GDPNow model, while the labor market is clearly softening? The economy is showing “no-hire, no-fire” signals.
- No-fire: Employers remain hesitant to lay off staff after the post-pandemic hiring challenges, keeping the layoff rate low.
- No-hire: Hiring has slowed significantly, with new job creation largely confined to non-cyclical sectors like healthcare and education, essential services, but not engines of long-term productivity or industrial expansion.
- AI-driven productivity: Companies are investing heavily in capital expenditure on AI and technology, enabling them to grow revenue and profits without significantly increasing headcount. This is becoming the new engine of corporate profit and GDP growth, even as the jobs market cools.
Meanwhile, markets remain buoyant, seemingly detached from the underlying economic divergence. Several factors explain this disconnect:
- Record corporate profits: Corporate profits have surged, benefiting disproportionately from the AI CapEx boom.
- Wealth effect spending: Investment valuations are driving the wealth effect, pushing the top-half of households to spend, vacation, and spend.
- Monetary and fiscal clarity: The Fed is continuing its normalization path, and market expectations are settling around the administration’s new economic agenda, particularly the deregulation agenda..
Ultimately, the question of whether a recession is imminent, in the U.S. or globally, is no longer just about cyclical indicators. It’s about structural inequality. The current economy is a high-wire act, where the resilience of aggregate data masks the fragility of the median American. The health of the system now rests on the continued willingness of high-income consumers to spend; a behavior increasingly tied to the volatile fortunes of the stock and housing markets.
CAD: Break below 1.40
The USD/CAD dropped sharply after the 1.40 level failed to hold, following a Reuters report that the Trump administration is considering restrictions on exports to China involving U.S.-origin software. According to Reuters, the proposed measures are being weighed as a response to China’s latest round of rare earth export restrictions. While the software export curbs are reportedly not the only option under consideration, they represent a significant escalation in trade tensions. The White House declined to comment. The news triggered a sharp selloff in U.S. equities, with the S&P 500 falling 0.5% and the tech-heavy Nasdaq 100 down 1%. The pair’s downside momentum is now setting its sights on the 200-day Simple Moving Average (1.396), for now holding at its 20-day SMA at 1.399.
The Bank of Canada’s Q3 2025 Business Outlook Survey, though now slightly dated, confirms the persistent cautiousness among businesses and highlights ongoing trade tensions and tariff-related cost pressures. The survey’s release is timely, coinciding with Prime Minister Carney’s affirmation that trade negotiations with the US are advancing. While sentiment has slightly improved, recession concerns are rising, with 33% of firms now planning for one. Uncertainty around global economic and political conditions continue to weigh on sales expectations, which remain weak across domestic and export markets. As demand softens and capacity remains ample, labour shortages have eased to their lowest level since 2020, and both investment and hiring intentions are subdued. Many businesses are prioritizing maintenance over expansion, and wage growth expectations are nearing pre-pandemic levels. Although input costs are rising, firms are constrained in passing them on, leading to stable selling price expectations and a moderation in one-year-ahead inflation forecasts to around 3%.
MXN: Range trading on downbeat data
The Mexican peso continues to trade within a relatively narrow range, but with a pattern of gradually higher highs, now approaching the 18.50 level. There’s been broader weakness in emerging-market currencies, which briefly extended losses following a Reuters report that the Trump administration is considering restrictions on exports to China involving U.S.-origin software. The news triggered a sharp selloff in U.S. equities, with the S&P 500 falling 0.5% and the tech-heavy Nasdaq 100 down 1%.
On the macro front, the Mexican Global Indicator of Economic Activity (IGAE) showed a 0.6% increase in August 2025 compared to the previous month, based on seasonally adjusted figures. However, the year-over-year variation for the IGAE was flat. This mixed performance suggests that monthly data through August show activity losing momentum in the third quarter after stronger-than-expected growth in the first half of the year.
Delving into the specifics of the monthly changes, the service sector, which is part of the tertiary activities and is often seen as a proxy for household consumption, saw a modest growth of 0.5%. Within services, strong growth in sectors like Professional, Scientific, and Technical Services at 7.8% and Retail Trade at 1.8% suggest persistent household consumption is providing most of the upside. Meanwhile, secondary activities experienced a decline, falling by 0.3% on a monthly basis. The weakness in the secondary sector was primarily influenced by drops in Construction and Manufacturing Industries, and this manufacturing slowdown shows increasing headwinds from US tariffs and payback from firms that brought forward demand earlier in the year. The overall tepid growth and loss of momentum in the third quarter, as evidenced by the flat annual IGAE growth, supports central bank projections for a widening negative output gap that will limit upward pressure on prices.
FX awaits US CPI Friday morning
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: October 20-24
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
