The September Institute for Supply Management (ISM) manufacturing index came in at 59.8, lower than August’s 61.3 and below the 59.9 forecast.

But that’s still a strong number. Along with positive developments on a trade war front, it was enough to send stocks and Treasury yields jumping at Monday’s open.

The ISM index – a forward-looking survey of more than 300 purchasing managers on orders, inventories, employment, and production – is a good look at the overall health of U.S. manufacturing.

The September reading – and the silence of the world’s most important central bank – suggest President Trump’s trade war is not yet impacting the economy.

As I noted last week, the Federal Reserve did raise its overnight interest rate, as promised. The target range for the federal funds rate is now 2% to 2.25%, up a quarter-point.

It’s hard to read silence, as Fed Chair Jerome Powell wouldn’t answer reporters’ questions about the possible effects of a trade war during his post-Federal Open Market Committee meeting press conference last week.

So, there’s no official word on when new tariffs might show up in economic data, such as inflation. Perhaps the official view is that it won’t be an issue for long.

Indeed, who knew that, over the weekend, Canada would finally agree to President Trump’s new North American free trade terms?

My sense following Powell’s press conference is that the chair is only as confident as he has to be in current Fed policy. And that means he’ll react to changes in incoming data.

Of course, that could be a problem. At the same time, that could create opportunity… a lot of it.

That’s why we’ll be watching Friday’s release of the September jobs report. Forecasters see a slight dip in non-farm payrolls as well as a smaller increase in hourly wages.

But what if it’s far worse than the market expects? That kind of “uncertainty” is good because it often creates overreactions and mispricing in the U.S. Treasury market.

And we can profit from it.

At the same time, by the time data drift, it might be too late to steer the ship and avoid a serious economic downturn.

Corporate, government, and consumer debt are at record levels. Higher interest rates mean higher costs of carrying that debt. So, sales and profits will get hit. Tax revenues will shrink. And consumers will get squeezed even harder.

All this adds up to “recession.” That’s what the Fed risks with this late-cycle money-tightening “normalization” plan.

If it happens, the Fed won’t be able to cut rates far enough, fast enough.

At that point, the American economy may well be on the path to possible deflation.

But, ultimately, we only care about movement, not direction.

And that means we profit when policy is confused, like right now…

Slowflation

The August Personal Income and Outlays report, released by the Bureau of Economic Analysis last Friday, was a bit weaker than expected.

Personal income was up 0.3%, consistent with July’s increase. But it was slower than the 0.4% consensus expectation.

And core inflation – or the prices of everything except food and energy – didn’t move. They were expected to rise 0.1%.

The personal consumption expenditures index – also known as the PCE Index – dropped to 2.2% year over year. The core index stayed at the Fed’s 2% target.

Weak Wake

August new home sales came in slightly below the estimate of 630,000 units. More concerning is the downward revision to July’s figures. There were 21,000 fewer units moved than initially thought.

That’s on top of a 2.4% decline in median prices, as builders are apparently starting to offer discounts.

New home sales are big. Buyers fill new homes with furniture and appliances, and they finish off the property with landscaping and other personal touches. That’s the “ripple effect” to our economy.

And that ripple is getting smaller and smaller.