Manufacturing business activity in the Dallas Fed district shrank at roughly the same clip in December from November with the district business activity index down to minus 10.9 from minus 10.4 in November.

Other signs of contraction included production dropping into contraction at minus 3.2 from a decent expansionary 20.5 in November. New orders, the forward-looking indicator, fell to minus 6.4 in December from 4.8 in November.

Prices paid remained problematic at 36.0 versus 35.3 in October. Prices received are down to 8.2 from 10.8, suggesting pressure on margins.

Employment fell to minus 1.1 in December from 1.2 in November.

The outlook remained moderately hopeful with the six-month business outlook at 10.8 in December versus 11.0 in November.

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.