What Is Bifurcation and What Does It Mean for the Economy?

Every now and again, dynamics in our economy coin a new buzzword. Think ‘shrinkflation’ describing smaller product packaging, for example. The latest such term is bifurcation.

The dictionary tells us that bifurcation describes a division into two parts. Economists may use the term to talk about dynamics that may seem opposing but occur at the same time. Here’s what that means.

Data Divergence

Consumer spending, the backbone of U.S. economic growth, has held up throughout the pandemic era inflation sticker shock. But consumer confidence is tied to incomes, so lower-income and higher-income Americans have different views on the economy and its future. And when this divergence gets so strong that it creates a two-speed economy in which only some are able to spend at all, it has a real effect for companies, the economy and the market.

Another example is this: Major stock market indexes and individual stocks are hitting all-time highs, but this rising tide has not lifted all ships. While Big Tech continues to climb higher, smaller-cap stocks are well behind, as smaller companies are more sensitive to high interest rates, which big companies can absorb more easily.

In both examples, interest rates are the crux of the story. The Federal Reserve raised rates to combat rampant inflation, which was a thorn in the side of American consumers and thus threatened economic growth. But even though inflation has slowly come down, it’s still not where the Fed wants it to be. For now, consumers see high interest rates, and high prices that continue to rise. Meanwhile, the U.S. economy has held up pretty well, with low unemployment and strong job growth. That’s worrying central bankers, who don’t want the economy to overheat once they lower rates.

Simply put, the bifurcated economy is a massive policy challenge, and at some point, something’s gotta give.

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