The pace of expansion in business activity in the U.S. Midwest slowed sharply and unexpectedly in June, hit by weakness in the automobile sector, a report showed on Wednesday.
The National Association of Purchasing Management-Chicago business barometer slid to 56.4 from 68.0 in May, and was at its lowest ebb since October. Economists had forecast the index at 65.0. A reading above 50 indicates expansion.
Patrick Fearon, economist at AG Edwards & Sons in St. Louis, said the report would give the Federal Reserve more breathing room for "measured" tightening of monetary policy.
"If this is suggesting a bit of moderation in the economic growth rate, then it should allow the Fed to raise interest rates at a modest pace going forward," Fearon said. "One positive here is that growth in employment remained at almost the same pace as May."
The employment component slipped to 53.6 from 54.8, but still strung together a rare three-month streak of expansion. The Chicago-area jobs index has been above 50 only seven times in about five years.
U.S. Treasury bond prices rose on the report while share prices dipped. The 10-year Treasury note yield fell to 4.64 percent from 4.67 percent before the data.
Pricing pressures continue to mount in the face of high energy and other raw material costs. The prices paid index rose to 84.5 from 80.0, while new orders slumped to 56.8 from 74.4.
"The main thing that I take away from the report is that 56.4 is still a healthy rate of expansion but the industrial economy took a breather rather than a dip," said David Littmann, chief economist at Comerica Bank in Detroit.
Many view the NAPM-Chicago report as an industrial indicator even though service sector companies are also polled.