A closely watched gauge of economic activity in the manufacturing-heavy Midwest tumbled to its lowest point since June 2013--but still signals growth, barely.

The Chicago Business Barometer, commonly called the Chicago PMI, sank to 52.6 in July from June's 62.6, suffering its largest point decline since October 2008. The index had hit a seven-month high of 65.5 in May.

The setback also surprised economists surveyed by The Wall Street Journal, who reached a consensus forecast of 63.0. However, any reading above 50 indicates to expanding activity.

The production subindex largely undermined the overall number, falling to 51.2 this month, a two-year low, from over 70 in June. Also, setbacks in the new-orders and prices-paid categories further fueled the tailspin.

Despite the decline, comments from the purchasing managers surveyed indicated they saw the sudden swoon as more of lull than the start of a new downward trend.

Philip Uglow, chief economist at MNI Indicators said, "The surprise fall in the Chicago Business Barometer in July, following a strong second quarter, naturally raises questions about the sustainability of the recovery."

Write to Paul Rekoff@paul.rekoff@wsj.com

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