May 29 (Bloomberg) -- U.S. business activity contracted at a faster pace than forecast this month as orders and employment dropped. The Institute for Supply Management-Chicago Inc. said today its business barometer decreased to 34.9 from 40.1 in April. Readings below 50 signal a contraction. Rising unemployment and banks’ reluctance to lend may weigh on spending, making it difficult for factories to recover from the worst economic slump in at least a half century. Private economists have scaled back forecasts for economic growth in the second half of the year. “Businesses are just not going to be of the mindset to add capacity when they have so much excess production capacity,” Derek Holt, an economist with Scotia Capital in Toronto, said before the report. Stocks, which had risen earlier in the day, headed lower. The Standard & Poor’s 500 Stock Index was down 0.3 percent at 904.37 as of 9:51 a.m. in New York. Economists forecast the gauge rose to 42, according to the median of 55 projections in a Bloomberg News survey. Estimates ranged from 34.2 to 45. A separate report today showed the economy shrank at a 5.7 percent pace in the first quarter, less than the government estimated last month. Following a 6.3 percent slump in the last three months of 2008, the decline capped the worst six-month performance in five decades. 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.

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