Deep contraction is not an exaggeration when it comes to either the Empire State index, at minus 24.6 in data released yesterday, or the Philadelphia Fed index at minus 23.2 in March data released today. This is the seventh consecutive month of contraction for Philadelphia's index.

Looking for a silver lining is a struggle. New orders are at minus 28.2 to signal deep overall contraction in the months ahead. Unfilled orders are at minus 21.3 to signal deepening declines for shipments, at minus 25.4 in today's report, and a reversal for employment. Employment is now in the negative column at minus 10.3. The general 6-month outlook is at minus 8.0.

But there is a silver lining, and that's moderation in inflation readings. Input costs are down a modest but still useful 3 points to 23.5 while selling prices are down a more substantial 7 points to 7.9. And 7.9 is the same reading for expectations of future selling prices to indicate stable conditions for inflation expectations.

Judging by the regional manufacturing surveys the Federal Reserve's job is done. Demand has been curbed and price pressures contained. Yet these surveys have yet to translate to similar contraction for definitive data, whether factory orders or industrial production.

The Philadelphia Fed manufacturing index, in contraction the last six reports and very deeply so in February at minus 24.3, isn't expected to show great improvement in March, at a 15.8 consensus.

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.