Economist Jim Paulsen says his new US financial-conditions gauge is in its most contractionary quartile, a level that preceded every major US recession since 1970 in his analysis. He expects weaker growth and rising recession fears, but says a recession is not his base case.
Paulsen says the gauge combines five economic policies and three economic forces, with seven of its eight components contractionary. Signals include rising Treasury yields and a flatter yield curve, fading fiscal support, higher oil prices, inflation pressures and falling real wages. The 10-year yield reached 5.09% this week; Brent traded near $101 a barrel Wednesday; core CPI rose 0.3% in August, while real hourly earnings fell 0.1%. CBO estimates put the federal budget deficit at $2 trillion in the first 11 months of fiscal 2026, $6 billion below the same period a year earlier.
Paulsen questioned whether the Federal Reserve should raise rates again. Fed officials have made hawkish comments in recent weeks, and markets expect two more rate hikes by year-end. He argued that further tightening after the gauge entered its most contractionary quartile could be a mistake, and expects lower bond yields and a more challenging stock market in coming months.
