The Dallas Fed's manufacturing index showed business activity contracted more than expected in May after a bigger than expected drop in April.

The general activity index fell to minus 29.1 in May from minus 23.4 in April and minus 15.7 in March. May's report showed the thirteenth straight contractionary result for this index. The May figure compared with the Econoday consensus expectation of minus 19.5.

Details in the Dallas report included new orders at minus 16.1 in May versus minus 9.6 in April and minus 14.3 in March. Production eased to minus 1.3 in May from 0.9 in April from 2.5 in March. Shipments were at minus 3.0 in May versus minus 2.8 in April and minus 10.5 in March.

Employment rose to 9.6 in May versus 8.0 in April and 10.4 in March. Hours worked were at minus 0.9 in May versus minus 2.7 from 2.6 in March. Prices paid for raw materials were at 13.8 in May versus 19.5 in April and 20.3 in March. Prices received registered 0.4 in May versus 8.4 in April and 7.0 in March.

On the six-month outlook, general business conditions registered minus 12.7 in May versus minus 16.6 in April and minus 11.2 in March. The six-month outlook for new orders was 3.7 in May versus 7.7 in April and 6.0 in March.

The activity index is expected to post a 13th straight negative score, at a consensus of minus 19.5 in May versus minus 23.4 in April which was much lower than expected.

The Dallas Fed Manufacturing Survey tracks factory activity in Texas on a monthly basis. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month. Responses are aggregated into balance indexes where positive values generally indicate growth while negative values generally indicate contraction. About 100 manufacturers regularly participate in the survey.

Investors track economic data like the Dallas Fed Manufacturing Survey to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that will not generate inflationary pressures. The Dallas Survey gives a detailed look at Texas' manufacturing sector, how busy it is and where it is headed. Since manufacturing is a major sector of the economy, this report can have a big influence on the markets. Some of the survey indexes also provide insight on inflation pressures -- including prices paid, prices received, wages & benefits, and capacity utilization. The Federal Reserve closely watches this report because when inflation signals are flashing, policymakers can reset the direction of interest rates. As a consequence, the bond market can be highly sensitive to this report. The equity market is also sensitive to this report because it is an early clue on the nation's manufacturing sector, reported in advance of the ISM manufacturing index and often in advance of the NAPM-Chicago index.