The Philly Fed's outlook for manufacturing just fell to a 3-year low

Manufacturing activity contracted less than expected in January according to the latest survey from the Philadelphia Federal Reserve.

The Philly Fed manufacturing index came in at -3.5, better than expected and up from last month's -10.2 reading. Expectations were for the report to come in at -5.9.

The report's reading on future expectations, however, continued to decline and is now at the lowest levels since November 2012.

In a note to clients on Wednesday Joe LaVorgna at Deutsche Bank said the Philly Fed's six-month outlook was particularly worth watching.

Philly Fed

The report also indicated that inventories continued to decline and that although the index for current new orders remained in negative territory it did increase 10 points from the prior month.

January's special question to survey respondents was about energy prices and the impact they are and will have on business activity, with most firms responding that the net effects have been positive, though of course a number of firms reported decreased demand from energy-producing companies.

Overall, the Philly Fed summarized the report, writing:

Weakness in regional manufacturing conditions continued this month, according to firms responding to the January survey. While indexes for current general activity and new orders remained negative, the indexes increased from lower readings at the end of last year. Firms reported an increase in shipments this month but a modest decrease in employment. Indicators for future conditions remained positive overall but suggested a continuing deterioration in confidence about manufacturing growth for the first half of 2016.