By Ben Leubsdorf

The U.S. manufacturing sector entered the new year with the wind at its back, finishing 2016 with its strongest growth in two years.

The Institute for Supply Management on Tuesday said its purchasing managers index rose to 54.7 in December from 53.2 in November, beating economists' expectations for a more modest rise and hitting its highest level since December 2014. A reading over 50 indicates expansion in the manufacturing sector; the gauge has signaled growth in nine of the past 10 months.

Factory activity strengthened in late 2016 as gauges of U.S. consumer confidence surged following the Nov. 8 presidential election.

"This is a reflection of consumer activity, and I think people are just feeling better for whatever reason about the economy," said Bradley Holcomb, who oversees the ISM survey. "We can all just hope that that continues."

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 last month 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 began to rise against other major currencies after the election of President-elect Donald Trump, a potential worry for U.S. manufacturers seeking to sell products overseas because a strong dollar makes exports more expensive for foreign customers.

But the recent rise has so far been more modest than the dollar strengthening seen in 2014 and 2015, and should have a smaller effect on the factory sector, said Paul Ashworth, chief U.S. economist at Capital Economics.

"Maybe it takes a point or two off the index at some point this year, but it's not going to drive it below the 50 mark" into contractionary territory, he said.

Inflation also was on the rise last month, with the index tracking prices paid for raw materials 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 saw 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 outright contraction in late 2015 and early 2016 as manufacturers were squeezed by the energy sector's slump and the strong dollar. But the manufacturing sector began to find its footing last year, aided by stabilization in global oil prices.

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 be material enough that we remain optimistic," Mr. Happe told analysts, pointing to solid consumer confidence and a buoyant stock market.

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. The Federal Reserve Bank of Atlanta's GDPNow model on Tuesday predicted a growth rate of 2.9% in the just-ended fourth quarter.

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

(END) Dow Jones Newswires

January 03, 2017 12:33 ET (17:33 GMT)

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