By Ben Leubsdorf

Growth in U.S. factory activity accelerated in December to its strongest pace in two years, a sign of momentum in a key sector of the economy headed into 2017.

The Institute for Supply Management on Tuesday said its purchasing managers index rose to 54.7 in December from 53.2 in November, hitting its highest level since December 2014.

A reading over 50 indicates expansion in the manufacturing sector, while a reading below 50 suggests contraction. Economists surveyed by The Wall Street Journal had expected a December reading of 53.6.

The details of Tuesday's report were upbeat. The new-orders index surged to 60.2 in December from 53.0 the prior month, and the production index was up to 60.3 lastmonth from 56.0 in November. The employment index increased to 53.1 last month from 52.3 the prior month.

The index tracking new export orders rose to 56.0 in December from 52.0 in November. The dollar has surged in value since President-elect Donald Trump's victory in the Nov. 8 election, a potential worry for U.S. manufacturers seeking to sell products overseas because a strong dollar makes exports more expensive for foreign customers. But that headwind doesn't seem to have materialized yet.

"The more recent dollar appreciation over the past few months will weigh on export-orientated manufacturers in the first half of next year but, up to now at least, that appreciation has been much smaller than the massive surge in" 2014 and 2015, Capital Economics chief U.S. economist Paul Ashworth said in a note to clients.

Inflation also was on the rise last month, with the prices index jumping to 65.5 in December from 54.5 in November,its 10th consecutive month of signaling growth.

In all, 11 of 18 sectors tracked in the report reported growth in December. Six industries reported contraction, and one saw no growth.

Factory activity has been weak and choppy in recent years. The ISM gauge had signaled contraction in late 2015 and early 2016 as manufacturers were squeezed by the energy sector's slump and a strong dollar, which damped foreign demand for U.S. exports.

But the manufacturing sector began to find its footing last year, aided by stabilization in global oil prices. The ISM index has signaled expansion in nine of the past 10 months.

Forest City, Iowa-based recreational-vehicle manufacturer Winnebago Industries Inc. last month reported strong revenue growth, and Chief Executive Michael Happe suggested he wasn't too worried about the recent rise in fuel prices and interest rates.

"We feel confident that the...tailwind elements continue to bematerial enough that we remain optimistic," Mr. Happe told analysts, pointing to solid consumer confidence and a buoyant stock market. "Even where fuel prices are today and where interest rates are today, it's very affordable for people to use and to gain access to the RV lifestyle."

Still, the industrial side of the economy remains in a weakened state. Federal Reserve data showed manufacturing output rose a meager 0.1% in November from a year earlier while total industrial production -- including production from mines and power plants -- declined 0.6% on the year.

Growth has been more robust in service industries, which account for the bulk of U.S. employment and economic output, and broad economic activity has continued to expand.

Gross domestic product expanded at a seasonally and inflation-adjusted annual rate of 3.5% in the third quarter, according to the Commerce Department, and the Federal Reserve Bank of Atlanta's GDPNow model last month projected growth at a 2.5% rate in the just-ended fourth quarter.

"Overall, we expect the economy will expand at a moderate pace over the next few years," Federal Reserve Chairwoman Janet Yellen said in mid-December.

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com

(END) Dow Jones Newswires

January 03, 2017 11:01 ET (16:01 GMT)

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