WASHINGTON Production at U.S. factories unexpectedly rebounded in July as motor vehicle output surged, but activity continues to be hamstrung by higher borrowing costs.

Manufacturing output increased 0.5% last month, the Federal Reserve said on Wednesday. Data for June was revised lower to show production at factories falling 0.5% instead of 0.3% as previously reported. Economists polled by Reuters had forecast factory output would be unchanged.

Production dropped 0.7% on a year-on-year basis in July. Since March 2022, the Federal Reserve has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range. That has pressured manufacturing, which accounts for 11.1% of the economy.

There are, however, tentative signs that manufacturing could be stabilizing. While the Institute for Supply Management's measure of national factory activity contracted for the 7th straight month in July, the pace slowed, with the ISM noting that "customers' inventory levels are at the proper tension ... a potential slight positive for future production."

Demand for goods also continues to hold up.

Motor vehicle and parts output accelerated 5.2% last month after declining 3.9% in June. The jump likely reflected difficulties adjusting the data for seasonal fluctuations.

Production typically falls in July when automakers idle plants for retooling. The temporary plant closures, however, do not always happen, which could throw off the model that the Fed uses to strip out seasonal fluctuations from the data.

Outside motor vehicles, durable manufacturing recorded increases in output of machinery as well as computer and electronic products. But production of electrical equipment, appliances and components declined as did that of primary metals, furniture and related products.

In nondurable manufacturing, there were modest decreases in the production of paper, plastics and rubber products as well as apparel and leather.

Mining output increased 0.5% after dropping 0.9% in June. Utilities production soared 5.4%, rebounding after three straight monthly declines as heat-wave across many parts of the country increased demand for air conditioning.

Overall industrial production shot up 1.0% in July after dropping 0.8% in June.

Capacity utilization for the industrial sector, a measure of how fully firms are using their resources, increased to 79.3% in July from 78.6% in June. It is 0.4 percentage point below its 1972–2022 average. The operating rate for the manufacturing sector rose to 77.8% last month from 77.5% in June and is 0.4 percentage point below its long-run average.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)