The expansion in business activity in the U.S. Midwest slowed in August as pricing pressures continued to mount, a report showed Tuesday.

The National Association of Purchasing Management-Chicago (search ) business barometer fell to 57.3, erasing a solid gain from July's 64.7. Economists had forecast the August index at 60.8.

A reading above 50 indicates expansion, and the Chicago index has been above that mark for 16 straight months.

Pricing pressures have built due to high energy and other raw materials costs. The prices paid index was a 16-year high at 86.6 and has been above 75 for six consecutive months. That trend has squeezed margins in some businesses, which because of overall slack in the U.S. economy, are unable to pass higher prices on to their customers.

"We're probably seeing a moderation in activity because of higher energy prices. The good news is that energy prices have started to retreat," said Gary Thayer, chief economist at A. G. Edwards & Sons in St. Louis.

U.S. Treasury bond prices rose on the report. The 10-year Treasury note yield slipped to 4.14 percent from 4.17 percent before the data.

The employment component of the index rose to 51.1 from 45.6 in July. New orders slipped to 58.0 from 68.7 in July.

Many view the NAPM-Chicago report as an industrial indicator even though service sector companies are also polled.

Weakness in the Chicago index was telegraphed in part by declines in regional manufacturing surveys by the New York and Philadelphia Federal Reserve (search ) banks earlier this month.

"The weakness in the economy in June and July is a continuing threat to the overall rate of expansion," said Drew Matus, senior financial economist at Lehman Brothers. "It's not the end of the world, just a slower pace of growth."