Excess Returns
Episode: 1% Growth. Zero Jobs | Jim Paulsen on the Recession Hiding in Plain Sight
Date: March 7, 2026
Hosts: Jack Forehand, Justin Carbonneau, Matt Zeigler
Guest: Jim Paulsen
Episode Overview
This episode features strategist and economist Jim Paulsen discussing the hidden recession within the U.S. economy, masked by explosive growth in “new era” (tech and innovation-driven) sectors. The conversation covers macroeconomic volatility, the impact of geopolitical conflicts (notably Iran), inflation, AI disruption, and the dichotomy between tech-driven growth and broader economic stagnation. Paulsen delivers clear perspectives on what’s truly powering the economy, why many Americans feel left behind, and what shifting market leadership might look like.
Key Discussion Points & Insights
1. The Divergence in Economic Growth: “New Era” vs. the “Old Economy”
[01:18, 33:22, 40:20]
- Main Insight: Only ~11% of the economy (tech, intellectual property, and related innovation sectors) is seeing explosive growth, while the remaining 89% is flatlining—yet aggregate GDP appears healthy.
- “The small 11% new era piece is now wagging the whole GDP dog. More importantly, it’s covering up the fact that the 89% of the older economy… is basically flatlined.” — Jim Paulsen [01:18]
- Historic comparison: Similar low growth in the past always coincided with deep recessions and job losses. Today, there’s virtually zero net job creation in the majority of the economy.
- Notable Statistic: Last year, real ‘new era’ spending grew 14 times faster than the rest of the economy.
2. Labor Market Stagnation & “Recession by Any Other Name”
[40:20, 41:04, 46:06]
- Despite modest GDP numbers, job creation has flatlined, and average unemployment duration has surged (~26 weeks).
- “Every other time that we had this situation... we were well into a recession or headed to one. And yet today we seem okay with this.” — Jim Paulsen [41:04]
- Corporate profits from information sectors still strong; profits from 89% of the economy barely growing.
- The disconnect explains persistent Main Street pessimism despite Wall Street’s strong headline numbers.
3. Impact of Geopolitical Conflict: Iran and Market Volatility
[04:06, 12:59, 13:28]
- The Iran conflict is a new episode in what Paulsen calls ongoing “Trump-utility”—persistent volatility from geopolitical and trade uncertainty.
- “We’ve kind of been so used to having something that’s always off the charts in terms of volatility under this administration... The VIX has gone from 15–16... now it’s 26.” — Jim Paulsen [04:06]
- Markets have already digested much of the volatility: bond yields, oil prices, and sentiment indicators have adjusted substantially.
- Major remaining risks: an Iran-sponsored attack on U.S. soil (“worst thing right now”) and direct boots on the ground.
Monetary Policy in Response
- Fed hesitancy: Weak jobs data may push policymakers to consider rate cuts sooner—potentially positive for equities.
- “This morning’s job numbers were pathetically bad. It’s going to bring the chance of more ease as we go through this year.” — Jim Paulsen [04:06]
4. The Dollar, Oil, and International Markets
[12:59, 13:28, 14:29, 14:38]
- Strong dollar is mainly a “flight to safety” effect, rather than being purely due to oil pricing.
- International equities, especially emerging markets, have been hit hard but may now present buying opportunities.
- “If you haven’t had an opportunity to kind of get your international position up... I think I’d take advantage of this... I’d rather be a net buyer of that weakness right now.” — Jim Paulsen [14:38]
5. Inflation: Falling Fears and “Disinflationary Forces”
[16:40, 16:52]
- Paulsen remains unconcerned about sustained inflation in the U.S.; higher energy prices act more as a tax on economic activity than as an enduring inflationary threat.
- “I’m not [worried about inflation]. Maybe I should be... But I think the underlying trend here is a fairly weak economy. And the part that isn’t weak is highly disinflationary.” — Jim Paulsen [16:52]
- AI and tech innovation are major disinflationary forces; U.S. is now more resilient due to energy independence.
6. AI as Disruptor: Innovation, Displacement, & Economic Measurement
[20:44, 21:36, 26:48, 27:55]
- Recent viral AI thinkpieces have triggered extreme concerns over job losses and economic transformation.
- Short-term: AI may cause rapid job displacement. Long-term: frees consumer wealth for spending elsewhere, creating new opportunities.
- “What it also does is it frees up a lot of new wealth to be spent elsewhere... I think, no doubt, [AI] will create a whole lot more opportunities for everybody.” — Jim Paulsen [21:36]
- Innovations often reduce costs dramatically, ultimately expanding net demand (e.g., once-elite legal services more accessible via AI).
- Limitations: Productivity measures don't fully capture tech-driven gains, making true AI impact hard to quantify.
- “I think we need a new productivity measure in this country... We really don’t measure productivity the right way to capture a lot of what’s going on.” — Jim Paulsen [29:22]
- Technological disruptions are always uncomfortable but historically “hugely profitable for the human race.”
7. Market Leadership, Breadth, and the “Leadership Toggle”
[47:45, 51:00]
- S&P 500’s strong performance masks that most gains are concentrated in “Mag 7” tech stocks; most other sectors have lagged.
- There’s historical precedent for leadership toggling between tech (“new era”) winners and the broader “old economy,” often triggered by shifts in monetary policy.
- “There’s been a toggle switch between new era and broad market plays for several decades... It’s been a bad approach to toggle one, toggle off the other and then toggle back.” — Jim Paulsen [51:00]
- As yield curve steepens and policy becomes less restrictive, value, small caps, and cyclicals may regain leadership.
8. Policy Implications: When Will the Fed Ease?
[60:30, 62:35, 63:11]
- Historically, major Fed easing cycles coincide with recessions, but today could be an exception—a “hidden” recession in 90% of the economy already exists.
- “I could argue... 90% of the economy is already in recession.” — Jim Paulsen [63:11]
- Easing, including possibly new fiscal stimulus, may soon be warranted, even if aggregate GDP still avoids an “official” recession label.
Notable Quotes & Memorable Moments
-
On hidden pain beneath the economic surface:
“Why are we worried about inflation when 90% of the economy is dying and the other 11% is a huge deflationary force?” — Jim Paulsen [46:06] -
On the Main Street–Wall Street disconnect:
“Every Main Street survey we have is pretty darn pessimistic... 90% of the economy is not doing well but it’s being covered up with our aggregate numbers.” — Jim Paulsen [48:29] -
On the illusion of broad prosperity:
“S&P earnings look okay today, but they’re really lopsided, leaving a lot that’s not okay over here in the broader economy.” — Jim Paulsen [44:52] -
On innovation’s true economic effects:
“All innovation is a disinflationary sort of force. But I do think there’s a real positive side... the free wealth that [AI] generates could be spent and applied elsewhere.” — Jim Paulsen [21:36]
Key Timestamps
- 01:18 – Main claim: GDP is being held up by a tiny, explosive “new era”
- 04:06 – Geopolitical volatility: market reactions to Iran conflict
- 13:28 – Safe haven dollar and oil-market implications
- 14:38 – International stocks: opportunity amid turmoil
- 16:40 – Inflation: still not a major concern
- 21:36–26:48 – AI, innovation, job disruption, and historical parallels
- 33:22–41:16 – The tale of two economies: new era vs. old
- 44:52 – Corporate profitability: concentrated in tech
- 47:45–51:00 – S&P leadership and “Mag 7 vs S&P 493”; toggle between tech and broad market
- 60:30–63:11 – Policy cycles, the “hidden” recession, and possible inflection point
Takeaways For Investors
- Headline economic data is increasingly misleading—dig into sector specifics to understand true risk and opportunity.
- Tech and innovation are distorting both headline growth and market returns, masking underlying economic weakness.
- Don’t fear temporary volatility from external shocks; policy response is likely to be supportive if real pain surfaces.
- Shifts in monetary policy and market leadership often come later than you think—watch small-cap, value, and cyclical sectors for early signs.