Chicago Business Activity Stays Solid in July

Business activity across the Midwest remained solid in July and firms hired for the first time in four months, a sign the U.S. economy started the third quarter on stronger footing. 

The Chicago Business Barometer, also known as the Chicago PMI, registered at 55.8 in July. The gauge hung on to most of the eight-point gain it notched in June, when it climbed back into expansionary territory. 

Economists surveyed by The Wall Street Journal expected the index to decline to 52.5. 

For the first time since January 2015, all five of the barometer's components came in above 50, the dividing line between expansion and contraction. New orders, a demand gauge, fell four points from June to 59.3 but held most of June's gain that had left the indicator at the highest level since October 2014. 

The Chicago reading is one of several monthly regional surveys meant to measure the health of U.S. production. The Chicago report is slightly different from the others in that it includes some firms from the bigger and better-faring service sector and because it isn't conducted by a Fed bank. The index is known to be a volatile one. 

This month, the regional surveys have, on balance, painted a picture of a manufacturing sector that remains healthier than early this year and late last, when the effects of the strong U.S. dollar, the energy price collapse and flagging international demand sapped orders for American manufactured goods. Those headwinds have eased in recent months, reigniting customer demand, but many factories are still struggling to meaningfully pick up production. 

In a positive development, Chicago-area businesses in July snapped a three-month streak of payroll reductions. "Although it's still relatively weak, should July's [employment] increase hold then it could be read as a tentative sign of growing business confidence about economic growth ahead," said Lorena Castellanos, senior economist at MNI Indicators, the compiler of the report. 

The survey follows the U.S. Commerce Department's gross domestic product report earlier Friday that showed economic growth sputtered this spring. GDP, the broadest measure of goods and services produced across the U.S., grew 1.2% in the second quarter, well below the 2.6% economists predicted and up only modestly from the first quarter's anemic rate. 

"Looking at the three-month average, the Chicago Business Barometer so far suggests economic activity running at a healthier pace in Q3," Ms. Castellanos said. 

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com