POSSIBLY NO RECESSION BUT STILL NOT GREAT

While the U.S. will likely avoid slipping into a recession, retired economist Jim Paulsen writes that growth may slow more than is widely appreciated in his blog, which cites four key warning signals.

The economist and market watcher who most recently worked as chief investment strategist at Leuthold Group, notes that in the last year growth in GDP, nonfarm payrolls, retail sales and industrial production slowed while housing starts have flatlined.

So he says: “U.S. real economic growth has decelerated to an unacceptable pace, dangerously close to recession-like conditions.”

While economic policy has been more accommodative lately, real economic activity seems poised to slow even further in the coming months, according to Paulsen.

With this, he sees recession fears becoming more pronounced in the coming few months. However, with the help of relatively conservative behaviors among consumers and businesses, widespread pessimism, strong private sector balance sheets and high levels of liquidity alongside supportive policies, he sees an imminent recession being avoided.

But all the same he highlights market metrics that suggest more slowing than broadly anticipated:

1) In the last 20 years, Paulsen notes, when consumer spending is led by low-income retailers like Walmart WMT and away from luxury retailers, economic growth typically slows.

2) Since late 2024, and particularly in 2025, inflation-sensitive stocks suggest “underlying U.S. inflation pressures are weakening significantly.” Weakness in inflation-sensitive stocks “implies a growing potential for a period of surprising weakness in U.S. commodity prices,” he said, adding that this “would likely only occur if the pace in real economic growth slowed more dramatically than most currently anticipate.”

3) In cyclical sectors like materials, industrials, consumer discretionary, and financials he notes underperformance throughout most of the current bull market. While the measure, it is “far from perfect and often with a variable lead time, when cyclical stocks have underperformed, U.S. industrial activity has typically slowed.” Since late-2024, annual industrial production growth has turned slightly positive while relative performance of S&P 500 cyclical sectors has continued to deteriorate. This has been particularly pronounced since the U.S. government shutdown caused a pause in economic data releases.

4) With relative performance of employment services stocks closely mirroring strength or weakness of the U.S. labor market, Paulsen notes that both have been softening this year.

“Even a small further deterioration in the U.S. jobs market during the balance of this year could result in a decline in overall U.S. job creation for 2025,” he said.