Business activity in the U.S. Midwest grew slightly more than expected in June, although it was still down from the previous month, a report showed on Wednesday.

The Institute for Supply Management-Chicago business barometer fell to 59.1 in June from 59.7 in May. Economists had forecast a June reading of 59.0.

A reading above 50 indicates expansion in the regional economy. The employment component of the index rose to 54.2 from 49.2 in May. New orders fell to 59.1 from 62.7.

"A combination of lean inventories and improving orders indicates that manufacturing output will be well supported in coming months," said Joshua Shapiro, chief U.S. economist at MFR Inc.

However, Shapiro cautioned that the long-term performance of manufacturing will hinge on an increase in demand.

"Once the effect of inventory adjustments wears off from the manufacturing data, it will be up to final demand to carry the baton," Shapiro said. "On that score, we believe that the recovery process will be subdued and uneven as the household sector continues to struggle with balance sheet issues and lingering labor market weakness.

U.S. stocks reacted favorably to the report.