WASHINGTON (MarketWatch) — The U.S. manufacturing sector grew in December at its fastest pace in seven months, marking the 17th straight month of expansion, according to a closely followed index issued Monday.

The Institute for Supply Management said its index of factory activity rose to 57.0% in December from 56.6% the prior month — the highest level since last May. Readings over 50% indicate that more firms are growing than contracting.

The ISM index was expected to rise to 57.5%, according to economists surveyed by MarketWatch.

The ISM report, the first major economic indicator released in 2011, helped to propel U.S. markets higher. The Dow Jones Industrial Average DJIA, +1.40% was up more than 120 points in recent trading.

“The manufacturing sector remains quite solid and with orders strong, there is no reason to believe that will change anytime soon,” said Joel Naroff, president of Naroff Economic Advisors. “That bodes well for future overall economic growth.”

Norbert Ore, head of the ISM’s survey committee, said the December report along with comments from the manufacturers suggests further momentum “as we go into the first quarter of 2011.” One electronics manufacturer told the ISM that “the end of the year is surprisingly busy.”

The gradual increase in U.S. manufacturing output corresponds with a worldwide trend. J.P. Morgan on Monday said its global-manufacturing index reached a six-month high to finish out 2010, setting the stage for faster economic growth in 2011.

In a separate report, the Commerce Department said U.S. construction spending rose 0.4% in November.

Inside the U.S. index

The U.S. manufacturing sector got a boost last year after companies restocked inventories they allowed to draw down during the 2007-2009 recession. Many businesses also made purchases they had long put on hold.

The result: The ISM index hit a one-year high of 60.4% last April.

The manufacturing sector is not growing quite as fast now, but it’s still in a rapid expansionary mode.

More important, history shows that U.S. gross domestic product tracks closely with the ISM index. The U.S. would likely grow more than 5% in 2011 if the ISM index averaged December’s 57.0% level over a full year, Ore noted. Such a level of growth — or anything close to it — would almost certainly slash the nation’s 9.8% unemployment rate.

Eleven of the 18 industries tracked by ISM expanded in December, the Tempe, Ariz.-based firm said.

Of particular note, the index for new orders jumped to 60.9% from 56.6% in the prior month. New orders are a strong indicator of future sales.

Production also increased. The index rose to 60.7% from 55.0%.

Much of the increase in demand appeared to be domestic, as the export index fell to 54.5% from 57.0%.

The inventories index, meanwhile, fell to 51.8% from 56.7%, likely reflecting stronger sales. And the backlog of orders moved up to 47% from 46%. Backlogs tend to strengthen as demand increases.

The employment index, however, fell to 55.7% from 57.5%, indicating that companies are still taking a cautious approach to hiring.

Manufacturers are also facing pressure on the cost of raw materials amid a global upsurge in commodity prices. The ISM’s prices index rose to 72.5% from 69.5%, the highest level in seven months.

The ISM surveys about 350 purchasing managers, who buy raw materials for their companies, if business got better or worse. The managers are involved in all sorts of decisions, including hiring, the delivery of supplies and the management of inventories.

The companies surveyed represent a cross section of the U.S. economy in sectors such as technology, electronics, furniture, industrial equipment, chemicals, furniture and clothing.