RTTNews - While a report released by the Institute for Supply Management - Chicago on Tuesday showed a continued contraction in Chicago-area manufacturing activity in June, the pace of contraction slowed by even more than economists had been expecting.

The ISM - Chicago said its index of activity in the manufacturing sector jumped to 39.9 in June from 34.9 in May, although a reading below 50 indicates a continued contraction. Economists had been expecting the index to increase to a reading of 39.0.

A slower pace of contraction in production contributed to the improvement in the sector, with the production index edging up to 39.3 in June from 38.1 in May.

The report also showed notable improvements in new orders and order backlogs. The new orders index rose to 41.6 in June from 37.3 in May, while the order backlogs index jumped to 37.6 from 26.3 in the previous month.

Inventories also saw a slower pace of contraction for the second consecutive month, with the inventories index rising to 34.2 in June from 31.5 in May.

Peter Boockvar, equity strategist at Miller Tabak, said, Bottom line, it's clear that the economy is not getting any worse (for now) with the inventory response on the part of manufacturers holding the key for the timing and degree of any upturn, particularly in the auto sector.

While the report also showed that the employment index rose to 28.9 in June from 25.0 in May, the reading continues to indicate notable weakness in the labor market.

On the inflation front, the ISM - Chicago said that prices paid index jumped to 36.3 in June from 29.8 in the previous month. The increase reflected the recent rise in commodity prices.

The Institute for Supply Management is due to release its national report on manufacturing activity Wednesday morning. The index of activity in the sector is expected to edge up to 44.0 in June from 42.8 in May.

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