UPDATE 1-US Midwest business falls hard in May

(Adds details, analyst comments, byline)

CHICAGO, May 29 (Reuters) - Business activity in the U.S. Midwest shrank in May at a far more severe rate than expected, with hiring in the deep-freeze in what many analysts saw as fallout from the collapsing auto sector.

The Institute for Supply Management-Chicago business barometer, released on Friday, slumped to 34.9 in May from 40.1 in April, when the index jumped surprisingly from March’s cycle low of 31.4.

Coming on the heels of a series of stronger regional reports this month, the weak Chicago ISM highlighted the erratic nature of any economic rebound in the United States.

“The Chicago PMI data was very weak. There is every prospect that this data reflects the auto shutdowns,” said Alan Ruskin, chief international strategist at RBS Greenwich in Greenwich, Connecticut.

Economists had forecast the index at 42.0. A reading below 50 indicates contraction in the regional economy.

The employment component fell to 25.0 from 31.8 in April. New orders slipped to 37.3 from 42.1 but production held steady at 38.1. Prices paid rose to 29.8 from 28.4.

U.S. Treasury debt prices added to the day’s gains after the report. Equities prices were mostly lower.

“Yields slipped back to session lows following the much weaker than expected Chicago PMI reading, which caught the market off-guard, though the Midwest manufacturing region has not exactly been booming given the difficulties with the auto sector,” said strategists at Action Economics.

Many analysts consider the ISM-Chicago survey to be a manufacturing report, although service-sector companies and non-profits are polled as well.

Jobs and income are about 30 percent more concentrated in manufacturing in the Fed’s seventh district, which includes Chicago, than in the nation as a whole.

Also on Friday, the Milwaukee purchasing managers index rose for a third straight month, to 43 from 39, and is now barely below its year-ago level.

“The improved Milwaukee PMI means that the Chicago PMI clearly stands out as an exception,” said strategists at 4CAST Ltd in New York.