Activity in the Chicago-area manufacturing sector continued to contract in the month of April, according to a report released by the Institute for Supply Management - Chicago on Thursday, although the pace of contraction slowed by even more than expected.

The report showed that the index of activity in the manufacturing sector rose to 40.1 in April from 31.4 in March, although a reading below 50 indicates a contraction in the sector. Economists had expected a more modest increase to a reading of 35.0.

Peter Boockvar, equity strategist at Miller Tabak, said, We are still clearly in recession territory, but the slowing pace of deterioration obviously has been the focus.

A slower pace of contraction in both production and new orders contributed to the improvement in the sector. The production index rose to 38.1 in April from 32.7 in March, while the new orders index jumped to 42.1 from 30.9.

Employment also contracted at a slower pace compared to the previous month, with the employment index rising to 31.8 from 28.1.

At the same time, the report showed an acceleration in the pace of contraction in inventories, as the inventories index fell to 30.6 in April from 34.9 in March.

Prices also contracted at a faster pace, with the prices paid index falling to 28.4 in April from 34.1 in the previous month. With the decrease, the index fell to its lowest level since 1949.

The ISM - Chicago report is the latest regional manufacturing report to show a slowdown in the pace of contraction in activity.

Earlier this month, the Philadelphia Federal Reserve said its index of activity in the manufacturing sector rose to a negative 24.4 in April from a negative 35.0 in March. Similarly, the New York Fed said its manufacturing index rose to a negative 14.7 from a negative 38.2.

The Institute for Supply Management is due to release its national manufacturing report at 10 am ET on Friday, with the index of activity in the sector expected to edge up to 38.0 in April from 36.3 in March.

In other economic news, the Labor Department released a report on Thursday showing a notable decrease in initial jobless claims in the week ended April 25th.

The Labor Department said that initial jobless claims fell to 631,000 from the previous week's revised figure of 645,000. Economists had expected jobless claims to come in unchanged compared to the 640,000 originally reported for the previous week.

At the same time, the report showed a continued increase in continuing claims, which rose to another new record high. Continuing claims in the week ended April 18th rose to 6.271 million from the preceding week's revised level of 6.138 million.

Separately, the Commerce Department released its report on personal income and spending in the month of March, showing that income and spending both fell by a little more than economists had been expecting.

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