Veteran strategist Jim Paulsen warns that the US economy is poised for a period of weakness.
According to Paulsen, the outlook looks troubling, with weak growth likely ahead, driven by a mix of past contractionary pressures.
He has devised a new gauge to assess how tight financial conditions are, reflecting the broader macro environment’s stance on growth. The Leading Financial Conditions Gauge tracks five policies and three forces, and has historically served as a precursor to economic growth and stock price movements, with data stretching back to 1970.
The model includes eight indicators, seven of which act as contractionary forces on the economy. Below is a summary of the contractionary signals captured by the gauge:
– Long‑term and short‑term Treasury yields are climbing. The 10‑year yield reached a post‑crisis high of 5.09%, while the 2‑year yield rose to 4.89%, its highest in about two years, as investors worry about inflation and fiscal health.
– The yield curve has flattened, showing short‑term rates rising faster than long‑term rates, indicating expectations of higher near‑term rates that could dampen growth.
– Fiscal support appears to be waning. Net deficit spending is declining, reducing the stimulus the economy receives. The federal budget deficit was $2 trillion in the first 11 months of the 2026 fiscal year, $6 billion less than the same period last year, per CBO estimates.
– Oil prices have risen. Brent crude traded around $101 per barrel, staying above the $100 threshold.
– Inflation is picking up. Although the overall CPI was flat in August, core CPI rose 0.3% month‑over‑month, up from 0.2% the prior month.
– Real wages are slipping. After inflation adjustment, average hourly earnings fell 0.1% in August, according to the BLS.
The gauge currently sits in its highest quartile, indicating that financial conditions are extremely tight. Historically, every major US recession has been preceded by the gauge reaching that level, Paulsen noted.
He wonders if the Federal Reserve should raise rates further from present levels. Recent hawkish remarks from central bankers and market expectations of two additional rate hikes by year‑end suggest a more restrictive stance.
Paulsen believes it would be a mistake for the Fed to tighten after the gauge surged into its most contractionary quartile, forecasting slower growth, heightened recession concerns (though likely not a full recession), lower bond yields, and a tougher stock market ahead.
Paulsen has been issuing bearish outlooks on markets and the economy for months, citing the Iran conflict and rising oil prices. He has previously warned of a potential large‑scale stock correction and a downturn, though he does not expect a full‑blown recession.