Business activity in the U.S. Midwest expanded in December but at a slower rate than expected, with hiring down after four months of growth, a report showed on Thursday.

The National Association of Purchasing Management-Chicago's (search) business barometer slipped to 61.2 this month from 65.2 in November. Economists had forecast the index at 63.0.

A reading above 50 indicates expansion in the sector, and the index has been above that level for 20 straight months.

"The Chicago PMI is moving back in line with other regional surveys," said Elisabeth Denison, economist at Dresdner Kleinwort Wasserstein (search).

The employment component of the index eased to 49.1 from 60.8 in November. Prices paid eased to 84.4 from 89.8 and new orders fell to 64.5 from 70.0.

"What we have here is a manufacturing economy that is still expanding but at a decelerated pace. This means that hiring decisions will become ever so much more cautious, together with new ordering," said David Littmann, chief economist with Comerica Bank in Detroit.

U.S. financial markets weakened on the Chicago PMI report, with the stock market slipping from pre-report levels and Treasury prices up strongly.

The data suggested that the U.S. economy may have lost some momentum late in the year, which could ultimately slow the pace of Federal Reserve (search) interest rate increases.

"This is a very bond-friendly report," said Evan Rourke, bond strategist at Popular Securities.

The report raised the prospect of a weaker Institute for Supply Management national factory report on Monday. The December ISM index is forecast at 57.8, unchanged on the month.

"We've had strong growth in 2004, helped by lower interest rates and tax incentives for capital spending. This is starting to fade," Denison said.

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