The Philly Fed's general activity index declined sharply in April to -24.9 from -17.4 in March, led by negative figures for new orders, employment, shipments, and unfilled orders. Special questions revealed that while manufacturers remain cautious, they were "somewhat more optimistic about the future."

After the April release, BMO economist Michael Gregory said the manufacturing sector was "flirting with recession."

For the May report, the consensus expects the index to improve to -19.0, with some forecasts ranging as high as -5.0 and as low at 28.0.

David Resler, chief economist at Nomura Securities, said the manufacturing sector is "generally weak" right now, but recent economic data give some reasons for optimism.

Retail sales came in "much stronger" than expected, he said, speculating that manufacturers could anticipate continued resilience from U.S. consumers in the near term as a result of the fiscal stimulus package.

Resler expects the index to improve to -20.0 in the month, but he said the broader story is the weakness itself rather than the particular number, which can be noisy.

Richard DeKaser, chief economist at National City Bank, said there is evidence that manufacturing is weak, but not as weak as earlier in the year. He said some very aggressive inventory reduction has given businesses an edge so they no longer need to cut back.

DeKaser is looking for a -10.6 reading in the survey, and he said the manufacturing sector will "continue to muddle along through the second quarter," with no net improvement but no real decline either, a trend already reflected in the national ISM.

Usually, the Empire State manufacturing report precedes the Philly Fed survey by several days, but this Thursday the Philly Fed will be released just 90 minutes afterwards. Both economists said having them together will be preferable.

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