We Asked Jim Paulsen What Happens When 87% of the Economy Can No Longer Be Ignored

Key Concepts

• "Bust-Booming" Economy: A term used to describe the extreme bifurcation of the U.S. economy, where a small "New Era" sector (tech/AI/IP) experiences rapid growth while the "Old Era" (87% of the economy) remains stagnant.
• New Era Spending: Business investment in information processing equipment and intellectual property products.
• Policy Juice: The need for monetary and fiscal stimulus to support the broader, non-tech economy.
• Supply-Side Inflation: The argument that current inflation is driven by temporary supply shocks (war, pandemics, tariffs) rather than excess aggregate demand.
• Labor Force Growth: A critical metric for sustainable GDP growth; current low growth (approx. 0.5%–1%) limits the economy's potential.

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1. The "Bust-Booming" Economic Backdrop

Jim Paulson argues that the U.S. economy is currently split into two distinct realities. While headlines focus on the "Magnificent 7" (MAG7) and AI-driven growth, the vast majority of the economy (87%) is at "stall speed."

• Data Point: New Era investment spending has grown at an 8% annualized pace over the last six quarters, while the rest of the economy has flatlined at 1.1%.
• Employment: Non-farm payroll growth has been a meager 0.3% over the last 18 months, and the unemployment rate has risen by a full percentage point.
• Synthesis: The stock market’s extreme concentration reflects this economic reality. Investors are complacent, holding onto tech stocks because they continue to rise, despite the lack of broad-based economic participation.

2. Inflation: Obsession vs. Reality

Paulson challenges the prevailing narrative that the U.S. is entering a 1970s-style inflationary spiral.

• Key Argument: The 1970s were characterized by excess demand driven by a surging labor force. Today, labor force growth is historically low (0.5%–1%), making it impossible to generate the excess demand required for runaway inflation.
• Supply-Side Focus: Current inflation is caused by supply-side issues (e.g., the conflict in Iran, the Strait of Hormuz, and pandemic-related supply chain disruptions).
• Policy Critique: Paulson argues that the Federal Reserve is misusing demand-side tools (raising interest rates) to solve supply-side problems. He believes this only serves to further weaken the already struggling 87% of the economy.

3. The Role of the Federal Reserve and Policy

• Perspective: Paulson believes the Fed will be "forced" to cut rates as growth in the broader economy continues to weaken. He views the current "tit-for-tat" political rhetoric between officials as a distraction from the underlying economic data.
• Actionable Insight: He suggests that the U.S. needs "greater policy stimulation" from both monetary and fiscal authorities to prevent a recession and ensure growth is fully participatory.

4. Market Outlook and Strategy

• Tech vs. Broad Market: While he does not predict a "crash" in tech, he expects it to underperform the broader market (small caps, mid-caps, value stocks) for the remainder of the year.
• International Markets: He notes that international stocks (specifically emerging markets ex-China) are showing signs of life as the U.S. dollar weakens from its recent highs.
• Bond Allocation: Paulson recommends adding long-term bonds to portfolios, anticipating that bond yields will eventually decline as the focus shifts from fighting inflation to promoting growth.

5. Notable Quotes

• "Our policy officials are just missing what’s going on in almost 90% of the United States economy because all we get is headlines about AI and how great the MAG7’s doing."
• "We have been fixated and obsessed with inflation for 5 years in this country... I think that could change this year."
• "If you have zero productivity and 1% labor force growth, you know how fast you can grow? 1%."

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Conclusion: The Main Takeaway

The primary takeaway is that the U.S. economy is currently experiencing a dangerous divergence. The "New Era" tech sector is divorced from the cyclical forces affecting the rest of the country. Paulson warns that if the Fed continues to prioritize inflation-fighting over growth-promotion, they risk pushing the 87% of the economy that is already at stall speed into a deeper recession. Investors should consider diversifying away from the highly concentrated tech sector and look toward broader market plays and bonds, as the national narrative is likely to shift from "inflation obsession" to "growth promotion" later this year.