The Dallas Fed's manufacturing survey dropped back into contraction in February after showing growth in January and December. The Dallas Fed's general activity index came in at minus 8.3 in February versus 14.1 in January and 4.5 in December. Prices paid surged in February to create an altogether disagreeable picture of slowing business with rising input costs.

Production fell to minus 9.1 in February versus 12.2 in January and 5.3 in December. New orders registered minus 3.5 in February versus 7.7 in January and 1.5 in December.

Employment was at minus 0.7 in February versus 2.2 in January and 0.4 in December. Capex managed to remain positive at 8.6 in February versus 13.0 in January and 10.9 in December.

Prices paid for raw materials jumped to 35.0 in February versus 17.5 in January and 12.1 in December. Pricing power held relatively stable in February with prices received at 7.8 in February versus 6.2 in January and minus 2.6 in December.

On the six-month outlook, general business conditions rather ominously dropped to 7.7 in February versus 35.5 in January and 20.6 in December.

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.