April 30 (Bloomberg) -- U.S. business activity contracted at a slower pace in April as orders and production improved.

The Institute for Supply Management-Chicago Inc. said today its business barometer increased to 40.1, the highest level since September, from 31.4 the prior month. Readings below 50 signal a contraction.

Combined with recent gains in consumer confidence and a steadying in home sales, the report indicates the worst recession in at least a half century is starting to ease. Still, companies including Caterpillar Inc. continue to limit spending and production in expectation that sales will not quickly recover.

“Things aren’t better, but they’re kind of bottoming out,” Jonathan Basile, an economist at Credit Suisse Holdings Inc. in New York, said before the report. “Stabilization in the manufacturing sector, particularly if orders begin to show improvement, would tell us the inventory adjustment related to large contraction in gross domestic product in the first quarter would be waning.”

Economists forecast the gauge would rise to 35, according to the median of 52 projections in a Bloomberg News survey. Estimates ranged from 30 to 38.6.

Other reports today showed consumer spending in March declined more than forecast, fewer Americans filed claims for jobless benefits last week and labor costs eased last quarter.

Spending Slowdown

Purchases decreased 0.2 percent after a 0.4 percent gain in February that was larger than previously estimated, the Commerce Department said. Incomes fell for the fifth time in the last six months.

Initial jobless claims decreased by 14,000 to a less-than- forecast 631,000 in the week that ended April 25, Labor Department data showed. The number of people staying on jobless benefit rolls rose 133,000 to 6.27 million, the 13th straight week the figure has set a record.

Separately, Labor reported employment expenses rose 0.3 percent in the first quarter, less than expected and the smallest gain on record.

The Chicago purchasers’ new orders gauge climbed to 42.1 from 30.9 the previous month and the production index increased to 38.1 from 32.7.

Fewer Firings

Today’s employment index rose to 31.8 from 28.1. The government is scheduled to release its April employment report on May 8. The U.S. has lost 5.1 million jobs since the downturn began in December 2007.

A measure of prices paid for raw materials decreased to 28.4, the lowest level since 1949, from 34.1 the prior month, while a gauge of delivery times fell to 45.4 from 48.4.

Federal Reserve officials yesterday voted to keep the benchmark overnight lending rate between banks in a range of zero to 0.25 percent and said the pace of economic contraction “appears to be somewhat slower.”

“Household spending has shown signs of stabilizing, but remains constrained by ongoing job losses, lower housing wealth and tight credit,” the Fed’s Open Market Committee said in a statement after its two-day meeting in Washington.

The U.S. economy contracted at a 6.1 percent annual rate in the first quarter, worse than economists had forecast, marking the weakest performance since 1957-1958. Inventories dropped at a record $103.7 billion rate in the first three months of the year, which some economists said may set the stage for better economic results starting this quarter.

Inventories Cut

The drop in stockpiles “was massive,” Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts, said before the report. “We’re not going to get that level of drag in the second quarter. The big issue there right now is how well will consumption hold up. Right now it doesn’t look all that strong.”

Economists watch the Chicago index for an early reading on the outlook for overall U.S. manufacturing, which makes up about 12 percent of the economy.

The Institute for Supply Management’s national manufacturing index, due tomorrow, probably climbed in April for a fourth consecutive month, also signaling a slower pace of decline, according to the Bloomberg survey median.

The global recession and the U.S. housing downturn have cut into sales and production.

Caterpillar, the world’s largest maker of bulldozers and excavators, this month posted its first quarterly net loss in 16 years and said full-year profit and sales will trail its previous forecast. The company, based in Peoria, Illinois, has cut more than 24,000 jobs since December and forecast the global economy will decline about 1.3 percent this year.

“A great deal of uncertainty exists in the global economy, making it extremely difficult to know how our customers will respond during the remainder of 2009,” Chief Executive Officer Jim Owens said in a statement.

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

Last Updated: April 30, 2009 10:01 EDT