Economist Jim Paulsen Warns of US Economic Weakness

Wall Street economist Jim Paulsen warns that the US economy is entering a period of weakness driven by tightening financial conditions. Using his Leading Financial Conditions Gauge, Paulsen identified seven contractionary forces, including rising short- and long-term Treasury yields, a flattening yield curve, and accelerating core inflation. He also cited rising oil prices, with Brent crude trading around $101 a barrel, and falling real wages, as the Bureau of Labor Statistics reported a 0.1% drop in average hourly earnings for August after inflation adjustments.

Paulsen argues that the Federal Reserve System may be making a mistake by maintaining a hawkish stance and considering further rate hikes while financial conditions are already in their most restrictive quartile. This comes as the Congressional Budget Office estimated the federal budget deficit at $2 trillion for the first 11 months of the 2026 fiscal year, contributing to a decrease in net deficit spending.

While Paulsen does not predict a full-blown recession as his base case, he expects the coming months to bring weaker economic growth, heightened recession fears, and a more challenging environment for the stock market.