The Institute for Supply Management's factory index eased to 57, from the prior month's 57.3, which was the highest since April 2011, the Tempe, Ariz.-based group's report showed Thursday. Readings above 50 indicate expansion. Orders were the strongest since April 2010 and a measure of factory employment climbed to a more than two-year high.
Factories are getting a boost from rising vehicle sales, which are encouraging automakers including General Motors and Ford to introduce new models, while the housing rebound is spurring orders for building materials. Stabilization in overseas markets also will lift the outlook for the world's largest economy.
"The year ended in a pretty bright spot for manufacturing and domestic demand," said Peter Newland, a U.S. economist in New York at Barclays, who correctly forecast the December ISM index. "It shows fairly robust consumption growth and business investment growth in the fourth quarter."
The median forecast of economists surveyed by Bloomberg called for 56.8. Estimates of 66 economists ranged from 55.3 to 58. Manufacturing accounts for about 12 percent of the economy. The factory gauge averaged 53.9 for all of 2013, an improvement from 51.7 a year earlier.
Stocks held losses, following the best year for the Standard & Poor's 500 Index since 1997, as technology shares retreated.
The group's new orders measure advanced to 64.2 from 63.6, and the gauge of employment increased to 56.9, the highest since June 2011, from 56.5.
The index of production cooled to 62.2 from 62.8 the prior month. The measure of orders waiting to be filled dropped to 51.5 from 54. The inventory index decreased to 47, the lowest since July, from 50.5, while a gauge of customer stockpiles rose to 47.5 from 45. A figure less than 50 means manufacturers are reducing stockpiles.
The factory index averaged 56.3 in the second half of 2013 after 51.5 in the first six months, making it a "great finish to the year," said Bradley Holcomb, chairman of the ISM's manufacturing report. Factories "are just burning off that inventory. Suppliers are having a bit of a hard time keeping up" with demand, he said on a conference call with reporters.
Manufacturing across the globe showed signs of uneven growth in December, according to other reports. In the euro area, an index of factory activity climbed to 52.7 from a November reading of 51.6, Markit Economics said. Manufacturing in Germany increased, while a gauge of factories in France dropped to a seven-month low. An index of British manufacturing cooled as export demand weakened, and readings in China slipped.
One area of the U.S. economy that remains a bright spot is automobile purchases, which in November reached the best annualized sales pace since 2007.
GM, which brought out 18 new or revamped models in the U.S. in 2013, plans 14 more this year as the largest U.S. automaker improves its lineup from one of the industry's oldest. Ford, the second-largest U.S. automaker, plans to start sales of 16 fresh or updated models, triple the prior year's number.
Gains in the ISM gauge beginning in June signaled growing confidence among factory purchasing managers and foreshadowed a rebound in durable goods demand. Commerce Department data on Dec. 24 showed orders for non-military capital equipment excluding aircraft, a proxy for future business investment in long-lasting goods such as computers and machinery, climbed in November by the most in 10 months.
The gain in business equipment bookings helped drive a 3.5 percent increase in orders for all durable goods.
Manufacturers are also benefiting from the housing recovery. New-home sales ran at a 464,000 annual rate in November after a 474,000 pace in October that was the fastest since July 2008.
Worthington Industries Inc., a Columbus, Ohio-based steel company, reported steel-processing shipments jumped 31 percent in its fiscal second quarter ended Nov. 30 compared with a year earlier, while revenue for the unit rose 43 percent.
"Contracts, orders and shipments have increased significantly in several of our most important market segments including automotive, agriculture, and construction," Mark Russell, president and chief operating officer, said on a Dec. 19 earnings conference call with analysts.
Among recently reported regional indexes, the MNI Chicago Report showed business activity grew in December, capping the strongest three months in more than two years. The Federal Reserve Bank of New York's general economic index for the region rose to 0.98 in December after contracting the prior month.
-- With assistance from Kristy Scheuble in Washington.