In the fifth straight negative reading and the seventh out of the last eight months, the Philadelphia Fed's index, at minus 8.9 for January, is signaling contraction for the Mid-Atlantic manufacturing sector. Nevertheless, there are several important positives in the report.

New orders contracted at a significant pace of minus 10.9 which, however, is half that of December's minus 22.3. Nevertheless, new orders have now contracted in each of the last eight reports. Unfilled orders go the way of new orders and they also have contracted for eight straight months and substantially so far this month, at minus 19.2.

Orders aside, Philadelphia's sample has been adding employees at a January index of 10.9. This reading suggests that the sample, facing a lack of available labor, is focusing on beefing up their staffs in anticipation of stronger demand ahead. And general confidence in the 6-month outlook, though only at 4.9, is the highest since May.

Lower inflation is no doubt a major factor in the improvement for confidence. Input costs are at 24.5, down nearly a dozen points from December for the best reading in 2-1/2 years. Selling prices at 29.9 are among the best readings in 2-1/2 years.

This report together with jobless claims which signaled stronger-than-expected conditions and housing starts & permits which signaled mixed results leave Econoday's Consensus Divergence Index at minus 1 overall, virtually at zero to indicate that the US economy is tracking right at economists' expectations.

In contraction in six of the last seven reports, the Philadelphia Fed manufacturing index is expected to come in at minus 10.3 in January.

The general conditions index from this business outlook survey is a diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district. This survey, widely followed as an indicator of manufacturing sector trends, is correlated with the ISM manufacturing index and the index of industrial production.

Investors need to monitor the economy closely because it usually dictates how various types of investments will perform. By tracking economic data such as the Philly Fed survey, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth so that it won't lead to inflation. The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on market behavior. Some of the Philly Fed sub-indexes also provide insight on commodity prices and other clues on inflation. The bond market is highly sensitive to this report because it is released early in the month and is available before other important indicators.