US Economy Heading for Rough Patch, Says Veteran Strategist

A veteran strategist is warning of an impending economic downturn in the US. Jim Paulsen, a Wall Street economist and former chief investment strategist at the Leuthold Group, has developed a new gauge to measure financial conditions. The Leading Financial Conditions Gauge looks at five economic policies and three economic forces and has proven to be a leading indicator of economic growth and stock prices.

The gauge currently sits in its topmost quartile, signaling that financial conditions are tight. Historically, every major recession in the US has been preceded by the gauge rising to this level, Paulsen said. The seven indicators in the model point to contractionary forces on the economy, including rising long-term and short-term yields, a flattened yield curve, fading fiscal support, higher oil prices, rising inflation, falling real wages, and tighter monetary policy.

Paulsen questioned whether the Federal Reserve should raise interest rates further from current levels. Central bankers have come out with hawkish comments on the outlook for monetary policy in recent weeks, but Paulsen is warning that it may prove to be a mistake. He predicts weaker economic growth, rising recession fears, lower bond yields, and a challenging stock market in the coming months.