After reporting slowdowns in the pace of expansion in Chicago-area business activity in the two previous months, the Institute for Supply Management - Chicago released a report on Friday showing an unexpected acceleration in the pace of growth in the month of July.

The ISM Chicago said its business barometer rose to 62.3 in July from 59.1 in June, with a reading above 50 indicating growth in Chicago-area business activity. The increase surprised economists, who had expected the index to fall to a reading of 56.3.

A notable acceleration in the pace of new orders growth contributed to the bigger than expected increase by the index, with the new orders index jumping to 64.6 in July from 59.1 in June.

Production growth also showed a modest acceleration, pushing the production index up to 65.0 in July from 64.2 in the previous month.

The report also showed a turnaround for inventories, with the inventories index climbing up to 50.8 in July from 46.5 in June.

Additionally, the employment index rose to 56.6 in July from 54.2 in June, indicating an acceleration in the pace of employment growth.

With regard to inflation, the prices paid index slipped to 58.1 in July from 61.9 in the previous month, suggesting a slowdown in the pace of price growth.

"On the surface, this is the first semi-major evidence the May-June slump may be giving way to faster growth in Q3," said Chris Low, chief economist at FTN Financial. "We'll see Monday if it carries into the national ISM figures."

Next Monday, the Institute for Supply Management is scheduled to release its report on national manufacturing activity in the month of July. The index of activity in the manufacturing sector is expected to slip to a reading of 53.5 from 56.2 in June.