The measures the Institute for Supply Management uses for domestic manufacturing’s health fell nearly across the board. New orders for manufactured goods dropped for the second month in a row to a level not seen since late 2009; production and employment contracted for the first time in three years. Another report on manufacturing activity — from IHS Markit, also released Tuesday — confirmed the findings, showing the weakest manufacturing activity in nearly a decade.

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Stocks slumped on the news, with the Dow Jones industrial average shedding 425 points by midmorning before staging a late rally and closing down 285 points, or 1 percent. But taken with new signs of trouble in the global economy, the flashing red signal of an inverted yield curve at home, and no end in sight to the U.S.-China trade confrontation, investors are clearly nervous a recession could be on the horizon.

The slowdown in American manufacturing comes as the sector has hit a skid worldwide, a development dating to last year that has grown worse as trade tensions have intensified. But the ISM survey left little doubt that the president’s tariff fight is weighing on manufacturers. Four of 10 respondents that the survey quoted invoked the trade war as a top concern (“While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession,” one respondent working in chemical products said.) None mentioned Trump’s preferred explanation for weakness in the sector: That the Federal Reserve hasn’t been aggressive enough in slashing interest rates.

And some economists and market watchers are warning that with no sign of the president deescalating his trade fight, the worst is yet to come.

“Unfortunately we're struggling to think of reasons why the required policy U-turn on the part of Mr. Trump might be imminent. It's coming, we think, once he begins properly to appreciate that Chinese are not going to fold and that the tariffs are a serious threat to his chance of re-election. But not yet,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a Tuesday note. “The headline ISM index is not yet bad enough to signal a recession in the broad economy — that requires a further drop of five points or so — or outright declines in payrolls. But it is weak, and still weakening, with no end in sight to the downshift. If the President and his economic advisers aren't now nervous about the outlook, they should be.”

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For companies feeling a sharper pinch from the trade war, Morgan Stanley notes that the waning effects of the tax cuts are making the pain from tariffs feel more intense. A strengthened dollar is also putting a crimp on the sector. From CNBC’s Carl Quintanilla:

The bank's chief equity strategist, Mike Wilson, is advising investors to buy defensive stocks as "demand destructive" tariffs stoke recession fears. And Goldman Sachs economists, in a Tuesday note, responded to the new manufacturing data by shaving two-tenths of a point off the firm’s estimate for third-quarter economic growth, to 2 percent.

The outcome has the potential to become self-fulfilling as key segments of the population demonstrate new anxiety about the economic outlook. As we noted here yesterday, consumer spending, a pillar of strength propping up economic growth at home as other categories of activity have flagged, suddenly looks soft, with sentiment among shoppers in August registering its steepest drop in nearly seven years. And confidence among small businesses also hit a seven-year low in August.

Now farmers, who have proven stalwart defenders of Trump’s trade policy, may be starting to buckle, as well. On Tuesday, a monthly survey of sentiment in the agriculture sector showed expectations for a positive outcome from the trade dispute dropped from 78 percent in July to 72 percent in August.

Taken together, the data should brace those still looking on the bright side of the U.S. economic picture. “Market bulls are resting their hopes on a strong U.S. consumer, yet key consumer variables such as unemployment and wages are lagging indicators — well known for trailing developments in the broader economy. If U.S. business activity buckles under the weight of trade tensions and a global downturn, consumers will follow,” the Wall Street Journal’s Aaron Back writes. “With both the yield curve and manufacturing surveys flashing red at the same time, it would be foolish to dismiss them both. No wonder investors are spooked.”

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MARKET MOVERS

— Boris Johnson suffers stinging defeat; what's next? FT's George Parker: "Boris Johnson on Tuesday night suffered a crushing defeat as Tory rebels joined forces with Labour and other opposition parties to seize control of the House of Commons agenda and derail his Brexit strategy. The defeat clears the way for MPs to vote on Wednesday on emergency legislation which aims to prevent Mr Johnson from taking Britain out of the EU on October 31 without a deal. It could also herald a general election...

"The MPs of the 'rebel alliance' should be able to turn their procedural victory on Tuesday night into a legislative triumph on Wednesday, when the bill to stop a no-deal Brexit is rushed through its Commons stages. The bill, which would require Mr Johnson to seek a Brexit delay until January 31 if he cannot secure an exit deal in Brussels, will then head to the House of Lords, where it could face a more complicated passage."

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— Hong Kong protesters secure big win. Reuters's Farah Master and James Pomfret: "Hong Kong leader Carrie Lam on Wednesday withdrew an extradition bill that triggered months of often violent protests so the Chinese-ruled city can move forward from a 'highly vulnerable and dangerous' place and find solutions...

"The withdrawal, a key demand of protesters, came after unrest that drove the former British colony to the edge of anarchy as the government repeatedly refused to back down... It was not immediately clear if the bill’s withdrawal would help end the unrest. The immediate reaction appeared skeptical and the real test will be how many people take to the streets."

— Big decisions await central banks. Bloomberg's Anchalee Worrachate and David Goodman: "Investors are increasingly signaling they don’t buy the inflation-boosting policies central banks are selling, with some even fretting stimulus may do more harm than good. Falling expectations for consumer-price growth, plunging bond rates and flatter yield curves all point to mounting doubts in financial markets over whether monetary policy makers have what it takes to reflate their economies and avert a global recession...

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"It’s all raising the stakes as the Federal Reserve, European Central Bank and potentially even the Bank of Japan get ready to announce easier policy as soon as this month... Such doubts are festering even after central banks delivered more than 700 interest rate cuts over the last decade and spent trillions buying bonds. While that helped dodge a depression following the 2008 financial crisis, price pressures remain muted and most major economies undershoot policy makers’ inflation targets."

Boston Fed President Eric Rosengren tells my colleague Heather Long he doesn't see a need to cut interest rates. Per Heather, "Rosengren said the U.S. economy is in a 'relatively strong' place with low unemployment, rising wages and solid growth driven by consumer spending... If the Fed lowers rates too soon, he is worried it would leave little firepower left to fight bigger problems later on."

— When Trump tweets a lot, stocks drop. CNBC's Thomas Franck: "Days when Trump tweets a lot are associated with negative stock market returns, Bank of America Merrill Lynch said Tuesday in a report. The brokerage’s chief equity strategist, Savita Subramanian, wrote in a note that 'since 2016, days with more than 35 tweets (90 percentile) by Trump have seen negative returns (-9bp), whereas days with less than 5 tweets (10 percentile) have seen positive returns (+5bp) — statistically significant.' A basis point is 0.01 percent.

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"In other words, when Trump tweets more than usual, the stock market tends to fall slightly, on average. 'Trade talk, political campaigning and tweets have contributed to volatility, from China to Fed policy to tax policy,' she wrote."

TRUMP TRACKER

TRADE-FLY AROUND:

— Trump was fuming after China's response to tariffs: "[Trump] wanted to double tariff rates on Chinese goods last month after Beijing’s latest retaliation in a boiling trade war before settling on a smaller increase, three sources told CNBC," CNBC's Kayla Tausche and Jacob Pramuk report.

"The president was outraged after he learned Aug. 23 that China had formalized plans to slap duties on $75 billion in U.S. products in response to new tariffs from Washington on Sept. 1. His initial reaction, communicated to aides on a White House trade call held that day, was to suggest doubling existing tariffs, according to three people briefed on the matter."

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CEOs were enlisted to cool Trump down: "Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer then enlisted multiple CEOs to call the president and warn him about the impact such a move would have on the stock market and the economy."

— Pelosi talked to Trudeau about the USMCA: "[Speaker] Nancy Pelosi told Canadian Prime Minister Justin Trudeau on Tuesday that Democrats are especially concerned about enforcement of the U.S.-Mexico-Canada (USMCA) free trade agreement and Mexico's implementation of labor standards, a spokesman for Pelosi said," Reuters's Susan Cornwell reports.

"Pelosi spoke by telephone with Trudeau to give him an update on negotiations between Congress and the U.S. Trade Representative's Office (USTR), repeating Democrats' 'key concerns of labor standards, prescription drug prices, environmental protections and concrete enforcement mechanisms,' the spokesman said in a statement."

Politico's John Bresnahan says Republicans view the PM as an ally in their efforts.

Meanwhile, DeLauro says don't expect a USCMA vote in 2019: “[Rep. Rosa] DeLauro’s role on the nine-member team is to ensure the enforcement mechanisms of the new treaty, called the United States-Mexico-Canada Agreement, or USMCA, are effective. But she also has an outsized role in determining what the final deal will be,” Ana Radelat reports for the Connecticut Mirror in a profile on the Connecticut Democrat.

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The biggest news from the story is that yet another key Democrat doubts NAFTA 2.0 will pass this year. “‘When we get to where we need to get to, we will move,’ DeLauro said. ‘We’re not there yet. And that’s critically important to understand.’ ”

POCKET CHANGE

— Walmart reverses gun policies after mass shootings: “Walmart will stop selling ammunition for military-style weapons and no longer allow customers to openly carry firearms in stores, becoming the latest big-box chain to bow to public pressure that has been building after a recent series of mass shootings around the country,” my colleague Abha Bhattarai reports.

“The world’s largest retailer had been under mounting calls to respond to two deadly shootings inside its stores this summer in El Paso, and Southaven, Miss. The decision was a blow to gun-rights advocates, some of whom had been showing up at Walmart locations carrying guns on their hips in the hope that the retailer would not shift its policies.”

— Purdue Pharma prepares for bankruptcy: "OxyContin maker Purdue Pharma LP is preparing to seek bankruptcy protection before the end of the month if it does not reach a settlement with U.S. communities over widespread opioid litigation, three people familiar with the matter said, after some states balked at the company’s $10 billion to $12 billion offer in August to end their lawsuits as part of a negotiated Chapter 11 case," Reuters's Mike Spector and Jessica DiNapoli report.

"Purdue lawyers have told lead attorneys for local governments and some state attorneys general for weeks, and again in recent days, that the company will have to file for bankruptcy without a settlement if one is not reached soon, one of the people said. This approach is known as a 'free-fall' bankruptcy filing because it lacks consensus on a reorganization beforehand."

— Auto union workers vote to authorize strikes: “United Auto Workers members overwhelmingly granted union leaders authorization to strike during contract negotiations this year with General Motors, Ford Motor and Fiat Chrysler, if needed,” CNBC’s Michael Wayland reports.

“The union on Tuesday announced about 96% of members at each of the automakers supported the action. That’s slightly down from negotiations four years ago, when workers at GM and Fiat Chrysler supported a strike by 97% and Ford at 98%. GM will lead the negotiations, which are expected to be the most contentious in at least a decade amid a slowdown in auto sales, a volatile trade environment and a widening federal probe into union corruption that led to UAW President Gary Jones’ home being searched last week by federal officials.”

— Oil industry urges Trump administration to ignore biofuels wishes: “The American Petroleum Institute on Tuesday urged the Trump administration to reject proposals floated by U.S. farmers and ethanol producers to boost ethanol demand, the latest development in the clash over biofuel policy,” Stephanie Kelly reports.

“[Trump] last week said his administration was planning a ‘giant package’ related to ethanol that would please U.S. farmers angry that many more oil refiners have been freed from obligations to use the corn-based fuel.”

— AT&T makes media head heir apparent to CEO: “AT&T Inc. promoted longtime executive John Stankey to a newly created No. 2 role, setting up the WarnerMedia boss as the likely successor to Chief Executive Randall Stephenson,” the Wall Street Journal’s Drew FitzGerald reports.

“Mr. Stankey, 56 years old, will serve as president and chief operating officer starting next month … Mr. Stephenson, 59 years old, hasn’t indicated when he plans to retire, though he has been CEO for 12 years and there are discussions for and against his retirement at the board level, the people said.”

CHART TOPPER

Companies used to direct most of their profits into capital expenditures; today, they're spending the majority on share buybacks and dividends, Deutsche Bank finds. Via Bloomberg's John Authers:

DAYBOOK

Today:

Federal Reserve Governor Michelle Bowman and St. Louis Fed President James Bullard speak at a "FedListens" event in St. Louis.

THE FUNNIES