By Shobhana Chandra Oct. 30 (Bloomberg) -- Business activity in the U.S. unexpectedly expanded in October, a sign the economic recovery that began in the third quarter will persist in coming months. The Institute for Supply Management-Chicago Inc. said today its business barometer increased to 54.2, the highest level in 13 months and exceeding the median forecast of economists surveyed by Bloomberg News, from 46.1 the prior month. Readings below 50 signal a contraction. Companies are gearing up to meet demand after the economy grew in the July to September period after four consecutive quarters of contraction. A slower pace of inventory reduction and rising sales abroad due to more than $2 trillion in global government stimulus also signal more production. “Many firms see brighter prospects for the future,” Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia, said before the report. “The domestic economy is in fact in recovery.” Economists projected the Chicago-ISM index would rise to 49, based on the median estimate of 58 economists in a Bloomberg News survey. Forecasts ranged from 47 to 52.5. Other reports today showed consumer spending fell in September after the “cars-for-clunkers” program expired and wage gains decelerated, reflecting mounting unemployment. Spending Falls Household purchases decreased 0.5 percent last month after jumping i.4 percent in August, the Commerce Department reported today. The decrease was the first in five months and the biggest since December. Employment expenses rose 0.4 percent in the third quarter and wages had the smallest 12-month gain since 1982, figures from the Labor Department also showed today. The increase in the employment-cost index was the same as the gain in the second quarter and followed a 0.3 percent increase in the first quarter was the smallest since records began in 1996. The new orders gauge jumped to 61.4, the highest level since June 2007, from 46.3 the previous month and the production index climbed to 63.9 from 47.2. The employment index decreased to 38.3 from 38.8, the report showed. A measure of prices paid for raw materials decreased to 48.6 from the prior month’s reading of 51.3, while a gauge of delivery times rose to 50.7 from 49.3. The index of order backlogs increased to 41.9 from 36.7 and the inventories gauge decreased to 32.2 from 38.9. Manufacturing Grows 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 Supply Management group’s nationwide manufacturing index probably rose this month to 53, the highest level since August 2006, from 52.6 in September, according to the Bloomberg survey median. The figures are due on Nov. 2. The world’s largest economy expanded at a 3.5 percent pace from July through September after a yearlong contraction as government incentives spurred consumers to spend more on cars, figures from the Commerce Department showed yesterday in Washington. Housing also rebounded as the first-time buyer tax credit boosted construction. Businesses seeing steadier demand include Caterpillar, the world’s largest maker of bulldozers and excavators, which issued a full-year profit forecast exceeding the highest prediction from analysts. Peoria, Illinois-based Caterpillar is considered a bellwether for its ties to construction and mining and its overseas presence. “We are seeing encouraging signs that indicate a recovery may be under way,” Chief Executive Officer Jim Owens said in a statement on Oct. 20. “We’ve already started planning for an upturn.”

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