In another disappointing reading, the US Philadelphia Fed manufacturing general business conditions index confounded expectations as it fell further into contraction at minus 16.4 in December after dipping to minus 5.5 in November from 10.3 in October. Forecasters were looking for a modest recovery to 2.5 in December with a range of 1.0 to 10.0, and they similarly expected a positive report in November.

Contributing to the decline: the key forward-looking subindex, new orders, slipped to minus 4.3 in December from 8.9 in November and 14.2 in October. Shipments slipped to minus 1.9 in December from 4.5 in November and 7.4 in October. Employment, everyone's focus, stayed positive at 6.6 versus 8.6 in November and minus 2.2 in October.

On the pricing front, prices paid came in at 31.2 in December versus 26.6 in November and 29.7 in October. Prices received were at 7.3 in December versus 14.3 in November and 17.9 in October. The six-month outlook for general business conditions eased to a still-upbeat 30.7 in December from a remarkable 56.6 in November and 36.7 in October.

Modest growth in manufacturing is expected to resume with the index at 2.5 versus minus 5.5 in November.

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.