As of December 2025, the Recessionist dashboard is flashing 9 out of 20 warning signals. The yield curve has un-inverted into a classic "bull steepener" pattern. Unemployment has spiked 0.8%. ADP shows hiring has collapsed. The divergence penalty is maxed at 100/100 because markets are completely ignoring labor stress.
Every one of these signals has historically preceded recessions. The 18-year real estate cycle points to 2026-2027 as the next downturn. The data says: prepare for impact.
But what if we're wrong?
This isn't hopium. It's intellectual honesty. If you're going to be bearish, you need to understand the bull case—not to dismiss it, but to know exactly what would have to happen for it to materialize. So let's steelman the soft landing scenario and assess whether it's a realistic possibility or a collective delusion.
The Warning Signals: Which Ones Matter Most?
The dashboard is flashing 9 out of 20 warning signals. But not all indicators are equal—some have impeccable track records while others have been crying wolf for years. For a soft landing, the critical signals would need to be wrong, though the weaker ones could plausibly be false alarms:
| Indicator | Current Signal | Why It Could Be Wrong |
|---|---|---|
| Yield Curve (50-80/100) | Steepening post-inversion - score depends on credit spreads context | Maybe it's just Fed normalization, not a recession signal |
| Unemployment (90/100) | 4.6% unemployment; Sahm Rule at 0.43 (below 0.5 trigger) | Rule triggered in July 2024 then moderated; 4.6% still concerning |
| ADP Employment (92/100) | -32K jobs = hiring collapsed | One-time revision; hiring could rebound |
| Divergence Penalty (100/100) | Markets ignoring labor stress | Markets are forward-looking and see recovery |
| Misery Spread (65/100) | Stagflation lite | Inflation falls faster than expected |
| Consumer Sentiment (60/100) | Consumers worried | Vibes don't equal spending—they keep buying |
| LEI (50/100) | Weakening | LEI has been "wrong" since 2022 |
| ISM PMI (50/100) | Contraction beginning | Manufacturing recession ≠ broad recession |
| Vigilante Spread (50/100) | Bond market tension | Fed maintains credibility, tension eases |
A Nuanced View: Not All Signals Are Equal
Here's the thing: not multiple key signals need to be wrong for a soft landing. Some indicators have better track records than others, and some have already been "crying wolf" for years.
Tier 1 — Historically Very Reliable:
- Sahm Rule (90/100) — Near-perfect track record as a concurrent indicator: it signals when recession conditions are already unfolding, not months in advance like the yield curve. Triggered correctly during every recession since 1950. Briefly triggered in July 2024 but has since moderated to 0.43 (below 0.5 threshold) as the rolling baseline adjusted. Important context: The July 2024 trigger was likely driven by labor supply expansion (2.4M immigration surge) rather than demand-side weakness like layoffs—a fundamentally different dynamic that Claudia Sahm herself predicted would produce a false positive. Unemployment at 4.6% remains concerning regardless of the indicator reading.
- Yield Curve Un-inversion (50-80/100) — Has preceded every recession since 1960, but also occurs during successful soft landings as the Fed normalizes rates. The signal is genuinely ambiguous: it could mean recession is imminent OR that policy is working. Context and other indicators matter.
Tier 2 — Strong But Imperfect:
- ADP Employment (92/100) — Good signal, but can be revised significantly
- Divergence Penalty (100/100) — Markets ignoring labor stress is concerning, but markets can stay irrational
Tier 3 — Has Been Wrong Recently:
- LEI (50/100) — Has been declining since 2022 with no recession yet. Credibility damaged.
- ISM PMI (50/100) — Manufacturing has been in "recession" for 2 years while services carry the economy
- Consumer Sentiment (60/100) — The "vibecession" is real—people feel terrible but keep spending
The math: For a soft landing, you don't need every signal to be wrong. But you DO need the Tier 1 signals to be wrong—and they're historically very reliable. The Tier 3 signals being false alarms is plausible (some already have been). But betting on Sahm Rule + Yield Curve both misfiring simultaneously? That's the core gamble.
A methodological caveat: These indicators are not statistically independent. The yield curve, unemployment, and credit spreads are all influenced by Fed policy, labor market dynamics, and credit conditions—they're correlated. This cuts both ways: if one is giving a false signal due to structural changes (like immigration affecting unemployment), others may also be distorted by the same forces. Conversely, when multiple correlated indicators align, it can represent one underlying signal appearing multiple times rather than independent confirmations. We present tiered analysis rather than probability multiplication precisely because treating these signals as independent "votes" would be methodologically unsound.
The 18-Year Real Estate Cycle Question
Beyond individual indicators, there's a historical pattern worth examining: the 18-year real estate cycle.
The pattern: 1990 → 2008 → 2026. Some economists (notably Fred Harrison and followers of Homer Hoyt's land cycle theory) argue real estate follows roughly 18-year boom-bust rhythms, driven by generational memory of crashes fading, lending standards loosening, and speculation building.
Important caveat: This is a pattern observation, not an established economic law like supply and demand. Critics argue it's backward-looking curve-fitting that ignores modern factors: Fed interventions, 30-year fixed mortgages creating "lock-in" effects, post-2008 underbuilding, and global events like COVID. The cycle may be "broken" or simply longer this time.
For a soft landing, this pattern would need to not repeat—which is entirely possible given how different the 2020s housing market is from 2006. We're undersupplied, not oversupplied. That said, the pattern has been remarkably consistent historically, so dismissing it entirely seems unwise.
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The Six Key Challenges for a Soft Landing
Based on current economic data, achieving a soft landing through 2028 requires threading a very specific needle. Here's what would have to go right:
Challenge #1: The Fed Executes a Perfect Goldilocks Pivot
The Federal Reserve has begun cutting rates, recently moving to the 3.50%–3.75% range. But the path forward is treacherous.
The requirement: Cut rates fast enough to stop the labor market from freezing, but slow enough to prevent a second wave of inflation.
The danger zone: If they cut too aggressively, inflation (currently sticky around 2.8–3%) could spike back up. If they pause too long, the "no hiring, no firing" labor market could collapse into mass layoffs.
Historical precedent: The Fed achieved a clear soft landing in 1994-95, and some economists also cite the mid-1960s and 2019 as examples (though definitions vary). That's perhaps 2-4 successes in 12+ rate-hiking cycles since World War II—better than often claimed, but still challenging odds. Not great odds.
Assessment: Possible but historically rare. The Fed would need to navigate better than they have in 90% of previous cycles.
Challenge #2: Unemployment Stays Below Recession Levels
The Sahm Rule situation: Created by economist Claudia Sahm, this rule triggers when the 3-month average unemployment rate rises 0.5 percentage points above its 12-month low. It briefly triggered in July 2024 at 0.53, but has since moderated to 0.43—below the 0.5 threshold.
What happened: This is historically unprecedented. The rule triggered, no recession followed, and the indicator "un-triggered" as the rolling 12-month baseline adjusted upward. Meanwhile, unemployment itself kept rising (now 4.6%).
The design limitation exposed: The Sahm Rule catches sudden unemployment spikes, not gradual deterioration. Unemployment rose 1.2 percentage points (3.4% → 4.6%) over 18 months, but because it happened slowly, the rolling baseline kept adjusting upward. The rule essentially "forgot" the old lows.
Why 4.6% is still concerning:
- It's the highest since 2021
- It's above the Fed's ~4.0% "natural rate" estimate
- Historically, sustained unemployment above 4.5% often precedes recessions
- The Sahm Rule's "all clear" at 0.43 may be misleading given the absolute level
The requirement for soft landing: Unemployment must stabilize or decline from current 4.6% levels. A further rise toward 5.0%+ would likely trigger the Sahm Rule again and signal genuine labor market deterioration.
Assessment: The Sahm Rule's brief 2024 trigger and subsequent retreat is actually encouraging for soft landing—it suggests the trigger was driven by immigration-related supply expansion, not demand weakness. But the 4.6% level itself bears watching. Current odds of this challenge being met: perhaps 50-55%.
Challenge #3: The AI Supercycle Delivers Real Productivity Gains
Much of the current economic optimism rests on massive AI capital expenditure by mega-cap tech companies.
The requirement: AI investments must transition from "spending" to "earning." AI needs to create actual productivity gains across the broader economy—not just tech sectors—to offset higher borrowing costs and wage pressures.
The risk: If investors decide AI is a bubble and pull back CapEx before 2027, a major pillar of current GDP growth vanishes overnight. We've seen this movie before with the dot-com bust.
Assessment: AI is real, but the productivity gains are still theoretical for most businesses. The timeline for broad economic impact is uncertain—it could be 2026 or 2030. Betting the entire soft landing on AI materializing fast enough is risky.
Challenge #4: Tariff Absorption
With average effective tariffs rising (forecasted to hit ~15% by early 2026), the economy faces a supply shock.
The economics: Standard theory says tariffs are a one-time price level adjustment, not continuous inflation. A 15% tariff raises prices once, then inflation returns to normal. The "one-time shock" isn't a challenge—it's the default expectation.
The real challenge: Can consumers absorb higher prices without a spending strike? This depends on whether tariffs trigger second-round effects (wage demands, retaliatory tariffs, supply chain restructuring) that turn a level shock into ongoing pressure. The K-shaped economy matters: high-income households may absorb costs while lower-income households pull back significantly.
Assessment: Tariffs create growth drag but aren't inherently recessionary. The risk is demand destruction if consumers are already stretched—which current sentiment data suggests they are.
Challenge #5: No Fiscal Cliffs or Policy Mistakes
The November 2025 government shutdown shaved an estimated 0.1–0.2% off GDP. The economy is sensitive to dysfunction.
The requirement: Congress must maintain fiscal stability without triggering a debt crisis. As tax cut impacts potentially wane in 2026-2027, the government must avoid austerity measures that suck liquidity from the market.
Assessment: Given current political polarization, betting on fiscal competence is a gamble.
Challenge #6: The Housing Market Unfreezes Without Crashing
High mortgage rates have locked homeowners in place, killing turnover and the massive secondary economy it supports (renovations, furniture, moving services).
The requirement: Mortgage rates need to drift down toward 5.5%–6%—the psychological "unlock" level—without triggering a price crash as inventory floods the market.
The paradox: If rates fall too fast, locked-in homeowners list simultaneously, creating oversupply. If rates stay high, the housing economy remains frozen. The Fed must thread another needle.
Assessment: This is actually the most plausible challenge. Housing supply is genuinely constrained unlike 2008, which provides a floor under prices. But "controlled thaw" is easier to theorize than execute.
The Soft Landing Scorecard
Here's what the data would need to show for a soft landing to be on track:
| Indicator | Danger Level | Required Level for Soft Landing |
|---|---|---|
| Inflation (Core PCE) | > 3.0% | 2.2% – 2.5% (stabilized) |
| Unemployment | > 4.7% | Stable or declining from current levels |
| Fed Funds Rate | > 4.0% | 3.0% – 3.25% by end of 2026 |
| GDP Growth | < 1.0% | 1.8% – 2.2% (slow but positive) |
| Mortgage Rates | > 7.0% | 5.5% – 6.0% |
| Credit Spreads | > 200 bps | < 150 bps |
Probability Assessment: Dream or Possibility?
Based on current data, the probability of a recession in 2026 hovers around 35–40%. That means there's a 60–65% chance of avoiding recession in any given year.
But here's the catch: avoiding recession in 2026 doesn't mean avoiding it in 2027 or 2028. The cumulative probability of navigating three years without recession, given elevated risk, drops significantly.
The key insight: Economic years aren't independent coin flips—they're correlated. If the Fed successfully navigates 2026, that likely improves 2027 odds through policy momentum. Conversely, if stress builds without recession, that accumulated pressure increases future risk. This means we can't simply multiply annual probabilities.
What we can say: sustaining a soft landing for multiple years while multiple Tier 1 warning signals flash is historically rare. The 1995 soft landing happened with fewer simultaneous red flags than we see today.
Methodology note: The probability ranges presented here (35-50%) are qualitative assessments based on historical pattern analysis, not outputs from rigorous probabilistic models. Academic recession forecasting research—including work from the Federal Reserve and NBER—shows that even sophisticated quantitative models struggle to predict recession timing with confidence intervals tighter than 12-18 months. We use descriptive language ("unlikely," "improbable") rather than false precision because the underlying uncertainty is genuinely large. These figures should inform general positioning decisions, not precise portfolio allocations.
What Would Change Our Mind?
We're not permabears. Here's what would genuinely shift our probability assessment toward soft landing:
- Unemployment stabilizes below 5.0% and begins declining — Would suggest the Sahm Rule trigger was indeed a false positive
- Credit spreads remain tight despite rate cuts — Would indicate no hidden stress in corporate credit
- AI productivity gains show up in non-tech sectors — Would validate the CapEx spending
- Housing transactions increase without price crashes — Would confirm controlled thaw
- Consumer sentiment improves while spending holds — Would close the "vibecession" gap
If we see 3+ of these materialize by mid-2026, we'd meaningfully raise soft landing odds.
Conclusion: Respect the Bull Case, But Don't Bet the Farm
Is a soft landing impossible? No. The 1994-95 cycle proves it can happen.
Is it likely? Also no. It requires the critical Tier 1 signals (yield curve, Sahm Rule, credit spreads) to be wrong simultaneously, while navigating 6 key challenges successfully.
The honest assessment: soft landing is possible but improbable—somewhere in the 35-50% range through 2028. That's not zero, but it's not something to build your entire financial plan around either.
The prudent approach is to hope for soft landing while preparing for recession. Maintain some risk assets to benefit if conditions align, but keep enough dry powder to capitalize when they don't.
Because when 9 out of 20 warning signals are flashing, "this time is different" is a very expensive bet to be wrong about.
Track these signals yourself. Recessionist Pro monitors all 20 warning indicators daily and gives you a simple 0-100 risk score. See the dashboard (disclosure: our product).
This analysis is for educational purposes only and does not constitute investment advice. Economic conditions can change rapidly. The soft landing scenario, while improbable, remains possible—which is precisely why monitoring the data matters.