Business activity in the U.S. Midwest expanded in December at a faster rate than expected as new orders improved, even as hiring contracted, a report showed on Thursday.

The National Association of Purchasing Management-Chicago business barometer rose to 52.4 from 49.9 in November. Economists had forecast the index at 50.5.

A reading above 50 indicates expansion, and the index had been above that mark for more than 3 1/2 years before dipping in November.

The employment component of the index fell to 45.8 from 49.4 in November, showing contraction for a second straight month. Layoffs increased while hirings fell, according to NAPM-Chicago.

Prices paid were steady at 60.2 while new orders rose to 57.8 from 52.0 — the strongest result since September.

"The survey suggests expansion of manufacturing, but it is just a regional survey. We have to wait until Tuesday for the Institute for Supply Management (national) report," said Michelle Meyer, economist at Lehman Brothers in New York.

Many analysts consider the NAPM-Chicago survey as a factory-sector report since the region is relatively industrialized, but service sector firms are also polled.

The index measures activity by companies based in the Chicago area, even if they have operations elsewhere.

U.S. Treasury yields rose on implications that the economy could be rebounding from the weak third quarter.

"The Chicago PMI has historically been a reliable coincident indicator of GDP growth," said Rudy Narvas, analyst at 4CAST Ltd. in New York.

The benchmark 10-year Treasury yield rose to 4.70 percent, its highest level since early November, from 4.64 percent just before the report.

Short-term rate futures also fell, trimming the implied chances for Federal Reserve rate cuts in early 2007.

"It gives ... the Fed some time before having to consider an easing," said Ashraf Laidi, senior market analyst at CMC Markets in New York.