WASHINGTON (Reuters) -U.S. manufacturing contracted at a moderate pace in November, with orders growing for the first time in eight months and factories facing significantly lower prices for inputs.

The improvement reported by the Institute for Supply Management (ISM) on Monday tracked similar increases in other sentiment surveys, which have risen on hopes of more business-friendly policies from the incoming Trump administration.

Still, manufacturing is not out of the woods yet. ISM Manufacturing Business Survey Committee Chair Timothy Fiore noted that "production execution eased in November, consistent with demand sluggishness and weak backlogs," and that "suppliers continue to have capacity, with lead times improving but some product shortages reappearing." Economists agreed.

"It is worth noting that in the aftermath of the 2016 election, the ISM index rose for four straight months, as business optimism swelled," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "I would not be surprised to see a similar dynamic this time, though in the current case, the underlying fundamentals for the factory sector have been tepid at best for a while."

The ISM said its manufacturing PMI rose to a five-month high of 48.4 from 46.5 in October, which was the lowest level since July 2023. A PMI reading below 50 indicates contraction in the manufacturing sector, which accounts for 10.3% of the economy.

Economists polled by Reuters had forecast a PMI of 47.5. November marked the eighth straight month that the PMI stayed below the 50 threshold, but above the 42.5 level that the ISM says over time generally indicates an expansion of the overall economy.

Only three industries, including computer and electronic as well as electrical equipment, appliances and components reported growth. Among the 11 industries reporting contraction were transportation equipment, machinery, miscellaneous manufacturing, chemical products and primary metals.

Comments from manufacturers were downbeat. Makers of transportation equipment reported that "business remains slow," and anticipated "the first half of 2025 will be similar."

Some machinery manufacturers said a slowdown in construction "has created a surplus of finished goods, creating the need for an extra two weeks of shutdown over the Christmas holiday period." Fabricated metal products makers said customers were destocking, adding "the preliminary forecast for 2025 is down significantly."

TARIFFS WORRY

Miscellaneous manufacturers worried about potential increased tariffs on Chinese imports, noting the "cost and capacity of U.S. manufacturing is a concern."

President-elect Donald Trump said last week he would impose a 25% tariff on all products from Mexico and Canada, and an additional 10% tariff on goods from China, on his first day in office. Some companies in the primary metals industry, however, reported an uptick in customers wanting to reshore their businesses after the election.

Inflation remained a concern for manufacturers of food, beverage and tobacco products. Makers of computer and electronic products reported pent-up buying, but complained "competition for qualified technical labor is a constraint on operational throughput."

Stocks on Wall Street traded higher. The dollar gained versus a basket of currencies. U.S. Treasury yields rose.

The ISM PMI has suggested manufacturing remains stuck in deep recession following hefty interest rate hikes from the Federal Reserve in 2022 and 2023. It has, however, not been all doom and gloom. Business spending on equipment has notched two consecutive quarters of brisk growth, reflecting in part an artificial intelligence boom and demand for commercial aircraft.

The U.S. central bank started easing monetary policy in September, and a third rate cut is expected this month. But potential changes in trade policy have left the path for further rate reductions in 2025 uncertain.

"With the Fed now possibly cutting at a slower speed, interest rates may not offer the tailwind that factories were looking for," said Oren Klachkin, an economist at Nationwide.

The ISM survey's forward-looking new orders sub-index increased to 50.4, expanding for the first time since March, from 47.1 in October. The production index was, however, little changed at depressed levels.

Its measure of prices paid by manufacturers dropped to 50.3 from 54.8 in October, suggesting goods prices have room to fall, though higher tariffs could see a reversal.

The survey's gauge of supplier deliveries fell to 48.7 from 52.0 in October. A reading below 50 indicates faster deliveries.

Factory employment continued to improve, but remaining at subdued levels, with the manufacturing employment measure climbing to 48.1 from 44.4 in October. The ISM noted less headcount reduction last month compared to October.

That is consistent with an anticipated acceleration in nonfarm payrolls growth in November, after a strike by factory workers at Boeing and another aerospace company tanked manufacturing employment in October. Job growth in October was also restrained by Hurricanes Helene and Milton.

The Labor Department's strike report last Friday confirmed the 38,000 aerospace employees returned to work in late October and early November.

A Reuters survey of economists estimated payrolls increasing by 200,000 jobs in November after rising by 12,000 in October, the fewest since December 2020. The closely watched employment report is due to be released on Friday.

A separate report from the Commerce Department showed construction spending increasing strongly in October, driven by single-family home building.

That offered hope residential investment was rebounding after contracting for two straight quarters. The Atlanta Fed upgraded its gross domestic product growth estimate for the fourth quarter to a 3.2% annualized rate from a 2.7% pace earlier. The economy grew at a 2.8% rate in the third quarter.