By Lucia Mutikani

WASHINGTON (Reuters) -U.S. manufacturing moved closer to recovery in December, with production rebounding and new orders rising further, but the outlook remains uncertain amid the threat of higher tariffs that could raise prices of imported raw materials.

Despite the increase in the Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI) to a nine-month high last month, the tone of the survey was less upbeat, with phrases such as “volume decreases” and “significant slowdown” appearing in some of the comments from respondents. None of the six largest manufacturing industries grew last month.

“Manufacturers ended the year with a hint of optimism, but they could face some pretty stiff challenges in the new year,” said Sal Guatieri, a senior economist at BMO Capital Markets.

The ISM said on Friday that its manufacturing PMI increased to 49.3 last month, the highest reading since March, from 48.4 in November. A PMI reading below 50 indicates contraction in the manufacturing sector, which accounts for 10.3% of the economy.

December marked the ninth consecutive month that the PMI remained below the 50 threshold. Economists polled by Reuters had forecast the PMI would be unchanged at 48.4.

Seven industries, including primary metals, electrical equipment, appliances and components as well as paper products and miscellaneous manufacturing reported growth last month. Among the seven industries reporting contraction were textile mills, machinery and transportation equipment.

Some manufacturers of food, beverage and tobacco products said they were “seeing a softening in sales,” adding that this “is concerning, as it’s our peak season.” 

Transportation equipment makers reported “automotive and powersport volume decreases.”

Machinery manufacturers reported a “significant slowdown in production requirements in the last two months of the year.” In the fabricated metal products industry, some businesses reported “order levels well below forecast projections.”

The mood was, however, fairly optimistic among manufacturers of electrical equipment, appliances and components, with some saying that “the increase in new orders has our plant at full capacity.” Makers of miscellaneous goods noted the “combo of seasonal factors plus increased demand outlook for 2025.”

Primary metals producers said “there is definitely an uptick this month, though not a stable one.”

Manufacturing was battered by the Federal Reserve’s aggressive monetary policy tightening in 2022 and 2023 to tame inflation. But sentiment surveys, including the PMI, have exaggerated the magnitude of the decline in factory production. 

Government data last month showed manufacturing growing at a 3.2% annualized rate in the third quarter and contributing to the economy’s 3.1% pace of expansion during that period. 

The U.S. central bank lowered its benchmark overnight interest rate by 25 basis points to the 4.25%-4.50% range last month. It was the third consecutive rate cut since the Fed started its easing cycle in September. 

The Fed’s policy rate was hiked by 5.25 percentage points in 2022 and 2023. A pledge by President-elect Donald Trump’s incoming administration to cut taxes could provide a boost to manufacturing. But other policy promises, including higher tariffs on imported goods, could increase raw materials prices.

Fed policymakers have projected two rate cuts this year, compared to the four they had forecast in September, because of the economy’s resilience and uncertainty over the impact of the incoming Trump administration’s policies.

Stocks on Wall Street were trading higher. The dollar slipped against a basket of currencies. U.S. Treasury yields were largely unchanged.

PRODUCTION REBOUNDS

The ISM survey’s forward-looking new orders sub-index increased to 52.5 from 50.4 in November, which marked the first expansion since March. Six industries, including electrical equipment, appliances and components as well as primary metals and miscellaneous manufacturing, reported orders growth. 

Textile mills, wood products and transportation equipment were among the eight industries reporting a decline in orders.

Production at factories rebounded after contracting for months. The survey’s measure of prices paid by manufacturers rose to 52.5 from 50.3 in November. 

“Businesses likely pulled forward demand given uncertainty around the future trade environment,” said Jeffrey Roach, chief economist at LPL Financial. Roach added that the rise in the measure for prices paid was “a sign of nagging inflation pressures.” 

Trump has vowed to impose a 25% tariff on all products from Mexico and Canada, and an additional 10% tariff on goods from China. Fears of higher tariffs were also evident in the rise in the ISM’s gauge of imports to 49.7 from 47.6 in the prior month.

Manufacturers are also building up stocks, with the survey’s measure of inventories at factories climbing to 48.4 from 48.1 in November.

Timothy Fiore, chair of the ISM’s Manufacturing Business Survey Committee, attributed the rise in both the imports and inventory indexes to “advance material deliveries to avoid potential tariffs,” and companies acting “to better absorb any potential tariff impact in the future.”

The survey’s gauge of supplier deliveries increased to 50.1 from 48.7 in November. A reading above 50 indicates slower deliveries. 

Factory employment contracted further, with the survey’s manufacturing jobs index falling to 45.3 from 48.1 in November. This measure has not been a reliable predictor of manufacturing payrolls in the government’s closely watched employment report.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)

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