RCM Managed Asset Portfolio - Is a Recession Coming?

RCM Managed Asset Portfolio

By Christopher Chiu, CFA

December 2025

Recession?

Last year about this time I reviewed the latest economic data to consider whether we were about to head into a recession. In this month’s letter we look at the question again.

Vague Signs

First, let’s look at the negatives. Unemployment is increasing. As of September, unemployment was at 4.4%, higher than the 4.1% rate a year ago.  So unemployment is trending higher. Unemployment rising above 5% will probably mean some kind of meaningful economic slowdown.

Looking at the picture above, the severity of any future slowdown will be determined by how far unemployment will exceed 5%. In 2008 and 2020 the unemployment rate went to 10% and above. If unemployment doesn’t increase much above 5% this time around, it will probably mean that we achieved what economists call a soft landing. The good news is that we aren’t near 5% unemployment yet, though as you will see, the unemployment rate in all cases tends to jump as we go into a recession.

Clearer Signs

There are a few signs that indicate a recession is close. Heavy trucks sales, which gauge more long-term investment, are no longer robust, as shown in the chart below. As you can see, sales start heading down before each recession. This is one of my favorite indicators because it gives a few months lead time before the other signs confirm a recession. In other words, it gives investors time to act before the storm really comes.

As seen above, heavy trucks sales were holding steady heading into the summer of 2025. Then there was a steep decline beginning late in the summer and continuing into the fall. If sales head down from here and head still lower, it portends a slowdown in spending and confidence. 300,000 heavy-weight vehicles sold per month historically has been a clear sign that we will soon be in a recession. We were between 300,000 and 400,000 heavy vehicles sold for the months of October and November.

Yet another picture is the spread between the 2-year Treasury bond and the 10-year Treasury bond. Everyone says that once the yield curve inverts and interest rates for short term borrowings are higher than long term interest rates, we are headed into a recession This is true but it doesn’t get the timing right as some recessions take a long time to develop after the yield curve inverts. The true tell occurs after the inversion, when the yield curve normalizes and retains its upward slope. When the 2-year Treasury yield is about 100 basis points (or one full percent) lower than the 10-year Treasury yield, we will find ourselves in a recession.

There are many explanations for why the normalization of this curve signals recession. But the most convincing one to me is that (1) during the yield curve inversion most banks don’t make many loans. Banks borrow from the short end to lend long, such as taking savings deposits to make 30-year fixed mortgages. And when the yield curve is inverted and the short end becomes costly to borrow, this operation cannot occur. This decrease in bank loans for a prolonged period decreases the money supply. (2) Then, with a decrease in the money supply and the eventual slowing of the economy, short-term Treasury bills eventually become a safe haven for investors. This pushes short-term yields much lower than longer-term yields as the yield curve normalizes.   

This explanation may not be comprehensive, but this visual pattern rooted in the market pricing of different Treasury bonds has held true in the last six recessions and there is no indication that the pattern will not hold again. Currently, short-term Treasury bonds are being sought after for their safety. The spread between 2 and 10 yr sits at around 60 bps. But if we have a jump in the spread, then it easily gets closer to 100 bps, which coincides with a recession. The normalization of the yield curve after an inversion therefore isn’t relief; it's the recession's prelude.

This decrease in the money supply has a telling effect on the employment picture. We said in the above that the unemployment rate is still hovering around 4.4% and that it has not yet jumped to 5%. But consider the related employment indicators. In a good economy, you would have people quitting their jobs because there is better opportunity elsewhere. But the number of people quitting their jobs has decreased steadily the last three years, possibly because there are not many opportunities available elsewhere. 

As seen, the rate of job quits decreasing below 2.3% has generally been a sign that the unemployment situation is so bad that many people cannot forgo their existing, stable employment at the risk of not being able to attain another. As of August 2025, that rate was already 2.0%. So, by this metric we should already be in a recession.

These are just a few of the signs of a recession becoming ever closer. I could have listed many more examples, such as job openings (JOLTS), new hires (HIRES), the youth unemployment rate, the 10-year minus 3-month Treasury yield, and the secured overnight funding rate (SOFR), all of which paint a consistent picture. Normally, I would not be convinced by merely one of these pictures. But look at the number of them.