U.S. manufacturing moved closer to recovery in December, with production rebounding and new orders rising further, though factories faced higher prices for inputs as the year ended.

The Institute for Supply Management (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 was the ninth consecutive month that the PMI remained below the 50 threshold. Economists polled by Reuters had forecast the PMI unchanged at 48.4.

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% expansion pace during that period.

The U.S. central bank is cutting interest rates, lowering 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 raise prices of raw materials.

The Fed has projected two rate cuts this year, fewer than the four it had forecast in September because of the economy's resilience and uncertainty over the impact of the Trump administration's policies.

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. Production at factories rebounded after contracting for months.

Its measure of prices paid by manufacturers rose to 52.5 from 50.3 in November. Its gauge of imports climbed to 49.7 from 47.6 in the prior month. Manufacturers could be bringing in more foreign goods in anticipation of higher tariffs. Trump has vowed to impose a 25% tariff on all products from Mexico and Canada, and an additional 10% tariff on goods from China.

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)