The Institute for Supply Management's manufacturing index climbed to 50.7 from a three-year low of 49.5 in November, the Tempe, Arizona-based group reported. Fifty is the dividing line between expansion and contraction. Other data showed fewer outlays for non-residential projects pushed down construction spending in November for the first time in eight months.

A rebound in housing and stabilization in global growth point to a pickup in sales that will boost companies such as General Electric Co. Stocks surged, sending the Standard & Poor's 500 Index to its biggest rally in a year, as Congress passed a bill averting spending cuts and tax increases that threatened to push the world's largest economy into a recession.

"We are starting the new year on at least a fairly firm note," said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who projected the ISM index would climb to 51. While some manufacturers have been holding back because of the budget debate, he said, "there is demand in this economy. As soon as businesses are able to take advantage of this, we'll see a bigger contribution from manufacturing to overall economic growth."

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