Chicago-area business activity unexpectedly contracted in the month of May, MNI Indicators revealed in a report released on Tuesday.

MNI Indicators said its Chicago business barometer dropped to 49.3 in May from 50.4 in April, with a reading below 50 indicating a contraction. The decrease came as a surprise to economists, who had expected the index to inch up to 50.7.

The decline by the business barometer was lead by a 6.6 point drop by the production index and a mild setback in new orders, with both indexes falling below 50.

The report also showed a steep drop by the inventories index, which fell to its lowest level since November of 2009.

MNI Indicators Chief Economist Philip Uglow said, "While expectations are that growth in the U.S. economy will bounce back in Q2, the evidence from the MNI Chicago Report shows activity weakening from an already low level."

"Firms ran down stocks at the fastest pace for more than 6 years in May, and while a rebuilding over the coming months could support output, the underlying message appears to be that businesses are not confident about the outlook for growth," he added.

MNI Indicators said its prices paid index fell slightly in May after having picked up by more than 10 points in April.

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