Chief economist update: US recession on the cards

"Yesterday, all my troubles seemed so far away
Now it looks as though they're here to stay..."

- The Beatles

Well, two yesterdays ago to be precise. This was on October 1 when the Reserve Bank of Australia (RBA) cut interest rates for a third time this year - taking the official cash rate down to a record low of 0.75% (with markets expecting another one before 2019 is over - that practically drove investors away from the zero yield on offer on savings account and into the higher yielding stock market.

As a result, the S&P/ASX 200 index rallied by 0.8% on that day ... only to drop by 1.5% the following day, as US recession fears came back to the fore.

This time, sparked by reports that the US Institute of Supply Management (ISM) manufacturing index dropped deeper into contraction territory from 49.1 in August to a reading of 47.8 in September - the lowest since June 2009 (GFC days) and lower than market expectations for an increase to 50.4.

Nine out of 10 of the ISM manufacturing sub-indexes remained at levels indicating contraction in September. The index for "supplier deliveries" was the only one that's expanding but that rate of expansion has also slowed to 51.1 from 51.4 in August.

The sliding momentum in the ISM manufacturing index certainly raises the spectre that a US recession is nigh that would take the global economy with it.

Is it? Will it?

The US National Bureau of Economic Research timed the last US recession to have started in the December quarter of 2007 - the ISM manufacturing index reading in December of that year was 49.0 (and was still at expansion levels months before).

While concerns over the inverted US yield curve appears to have faded over the past few weeks, the yield curve has remained inverted, justifying views that the Fed's rate cuts in July and September weren't enough and expectations that it would cut by another 25 basis points at its October FOMC meeting (with 77% probability).

This is consistent with the Federal Reserve Bank of New York's calculus of the probability of a US recession one year from now, which has surged to 37.9% from just 14.5% a year earlier and closing in to the peak 41.7% probability before the last US recession.

The Australian economy had dodged the US recessions of 2001 and 2008, will it be third time lucky?

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