The ISM showed the production index increased to 59.9 in December from 56.6. The new orders measure rose to 57.6 from 56.7, while the group's gauge of export orders picked up to 53 from 52.
The inventory index dropped to 47.1 from 48.3, while a gauge of customer stockpiles decreased to 42.5 from 50.
Factory Employment
The index of prices paid rose to 47.5 from 45. The employment index rose to 55.1, the highest since June, from 51.8. Manufacturing payrolls rose by 5,000 last month after a 2,000 gain the prior month, according to a survey of economists surveyed by Bloomberg before the Labor Department's payroll report on Jan. 6.
A government tax credit may have contributed to an increase in business demand for equipment in the months leading up to the end-of-the-year deadline. The Obama administration's tax compromise allowed companies to depreciate 100 percent of capital outlays in 2011 and 50 percent in 2012.
A reviving auto industry is also boosting the U.S. economy. Light-vehicle sales ran at a seasonally adjusted annual rate of 13.6 million in November, the fastest since August 2009, according to Autodata Corp.
General Motors Co., the largest U.S. carmaker, posted November sales growth of 7 percent versus a year earlier, partly due to Americans replacing older vehicles.
"It's the underlying replacement demand and economy, as well as the great new products, that are really driving it," Don Johnson, GM's vice president for U.S. sales, said on a conference call last month.
Ford's Sales
Ford Motor Co. last week said its namesake brand exceeded 2 million U.S. sales for the first year since 2007, led by gains for models such as the Fiesta small car and revamped Explorer sport-utility vehicle.