Jan. 31 (Bloomberg) -- A gauge of U.S. business activity in January unexpectedly pointed to a contraction for the first time since April 2003 as new orders fell.

The National Association of Purchasing Management-Chicago said today its business barometer fell to 48.8 this month from 51.6 in December. A reading lower than 50 signals contraction.

Companies have restrained production and postponed purchases of equipment as they worked off stockpiles built up last year. The Chicago area has been harder hit than most regions by cutbacks at automakers including Ford Motor Co.

``The trend in manufacturing is to go lower and has been that way over the last year,'' said Chris Low, chief economist at FTN Financial in New York. ``Chicago is heavily invested in autos and we know they've had some inventory adjustment there.''

Economists expected the index to rise to 52 from 51.6 in December, according to the median of 54 forecasts in a Bloomberg News survey. Estimates ranged from 50 to 55.

The U.S. economy grew at a faster-than-forecast annual pace of 3.5 percent last quarter, propelled by a rebound in consumer spending as gasoline prices fell and wages grew, the Commerce Department reported earlier today.

The growth rate was the strongest since the first three months of 2006 and followed a 2 percent third-quarter pace. A measure of inflation watched by the Federal Reserve rose at a slower pace.

The Chicago purchasing managers' new orders index fell to 46.3 from 56.4, today's report showed. The gauge of order backlogs rose to 46.4 from 44.5 in December.

The employment index fell to 42.8 from 48.2, while the production index rose to 53.2 from 49.7.

Order Backlogs

Some economists say the Chicago report foreshadows the nationwide manufacturing survey from the Institute for Supply Management, which will be released tomorrow. Economists forecast the index will rise to 51.8 in January from 51.4 in December.

December's ISM showed manufacturing unexpectedly expanded after shrinking for the first time in more than three years in November. The report followed an increase in the Chicago purchasing manager's gauge for December.

``There have been large regional variations in manufacturing activity,'' said Steven Wood, chief economist at Insight Economics LLC in Danville, California. ``At the national level it still appears to be growing modestly.''

Production in the Midwest region has been restrained by cutbacks in the auto industry.

Detroit-based Ford, the second-biggest U.S. automaker in terms of sales, cut fourth-quarter production in North America by 24 percent.

Production Cuts

Ford on Jan. 25 said it will cut production in the first quarter more than previously planned and build 740,000 cars and trucks instead of 750,000.

``We fully recognize our business reality and are dealing with it,'' Ford Chief Executive Officer Alan Mulally said on a conference call.

Consumer demand is picking up, recent reports suggest. Retail sales had the biggest increase in five months in December, and consumer confidence in January rose to the highest level since May 2002.

American companies are also benefiting from rising overseas demand as the global economy expands. The U.S. trade deficit shrank in November to the smallest since July 2005 as exports rose to a record.

Caterpillar Inc., the world's largest maker of earthmoving equipment, this month said fourth-quarter profit rose 4.3 percent on increased sales in China and India. Sales gained 14 percent to $11 billion, the Peoria, Illinois-based company said.

Delivery Times

The Chicago purchasing managers' measure of delivery times rose to 52.2 from 45.7 in December. An index of prices paid for raw materials fell to 54.9 from 56.9.

Declining oil prices are cutting business costs. The average price of a barrel of crude oil traded on the New York Mercantile Exchange fell to $54.15 this month from $62.09 in December.

``Energy prices themselves could be a source of support for growth this year,'' Federal Reserve Bank of San Francisco President Janet Yellen said in a speech on Jan. 22.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net.

Last Updated: January 31, 2007 10:28 EST