Last month when the September Philly Fed report signaled a sharp slowdown in the economy, the usual soft-landing bulls (but not the bond market) discounted it as a fluke and pointed to the much stronger results from the Richmond Fed report as suggesting that the hard landing was an illusion. Too bad that the Philly Report for October last week signaled further weakness and downturn in the economy with conditions worsening in October relative to September. If soft-landing optimists hoped that the October Richmond Fed survey will counter the results from the Philly Fed, their expectations were dashed today.  As reported by Reuters:

Manufacturing activity in the central Atlantic region was flat to slightly lower in October, the Federal Reserve Bank of Richmond said on Tuesday, citing the findings of its latest survey of factory sentiment. The Richmond Fed said that its seasonally adjusted composite index -- its broadest measure of manufacturing activity -- declined to -2 from a reading of 9 in September. "Among the index's components, shipments dropped sixteen points to -7, and new orders moved down eleven points to -1. The jobs index trimmed four points to finish at 4," it said in a statement posted on the bank's Web site.In the service sector, revenues grew at a slower pace in October, weighed down by the decline in big-ticket sales. The index moderated to 5 in October from 11 a month ago, the Richmond Fed said.

One important point to observe is that the Richmond survey for businesses showed that there was real sharp weakness in retail firm; actually most of the weakness was concentrated in such firms. This is prima facie evidence that what used to be one of the hottest housing markets in the US, not only is is now one of the weakest housing markets but that this weakness is now spilling over from housing to consumption. So, the myth out there that the housing slowdown has not spilled over to consumption has been proven wrong. These Philly and Richmond reports, together with further sharp fall building permits (a strong leading indicator of future housing starts) together with falling mortgage application, falling business loans, falling industrial production and capacity utilization and a lousy September payroll report are the first signals that Q4 growth will not rebound as the new soft-landing consusensus is now spinning. Since Q3 will be dismal - I forecasted since last August (not since last week as most monday-morning quarterbacking forecasters are now doing) that Q3 growth would be at most 1.5% and most likely closer to 1% - the new bullish spin is that we will have a growth rebound in Q4. Rebound based on what? Mostly wishful thinking. The first hard data from October from truly leading indicators - the Philly and Richmond Fed reports - suggest that the Q4 fourth rebound is only a dream in the mind of those talking and spinning about it. Expect payrolls for October to be much worse than the dismal 51K of September. The economic slowdown of Q3 is actually, based on these hard data, worsening in Q4, based on the latest indicators. We are still headed towards near zero growth in Q4 and a recession by Q1 or Q2 of 2007.