WASHINGTON Production at U.S. factories unexpectedly fell in June, but rebounded in the second quarter as motor vehicle output accelerated after two straight quarterly declines.

Manufacturing output dropped 0.3% last month, the Federal Reserve said on Tuesday. Data for May was revised down to show production at factories falling 0.2% instead of edging up 0.1% as previously reported. Economists polled by Reuters had forecast factory output would be unchanged.

Production decreased 0.3% on a year-on-year basis in June. It rebounded at a 1.5% annualized rate in the second quarter after shrinking at a 0.2% pace in the January-March period. Factory output, which had also contracted in the fourth quarter, was boosted by a 36.7% surge in the production of motor vehicles and parts in the second quarter.

Manufacturing, which accounts for 11.1% of the economy, has been hamstrung by 500 basis points worth of interest rate increases from the Fed since March 2022, when the U.S. central bank embarked on its fastest monetary policy tightening campaign in more than 40 years. Spending is also shifting to services and away from goods, which are typically bought on credit.

The Institute for Supply Management's measure of national factory activity has remained below the 50 threshold, which indicates contraction in manufacturing, for seven straight months. But there are flickers of hope.

The ISM survey this month showed customers viewed inventories as being "too low." Private inventory investment rose at its slowest pace in 1-1/2 years in the first quarter. These developments bode well for future factory production.

Motor vehicle output fell 3.0% last month after rising 0.8% in May. Manufacturing output of consumer goods meant to last three years and more fell 2.7%, led by notable declines in appliances, furniture, and carpeting as well as automotive products. Production of nondurable consumer goods fell 0.9%, pulled down by clothing, energy as well as food and tobacco.

Overall, durable goods manufacturing output dipped 0.1% while the production of nondurable goods dropped 0.6%.

Mining output slipped 0.2% after declining 1.4% in May. Utilities production decreased 2.6%, falling for a third straight month.

With manufacturing, mining and utilities output all declining, overall industrial production slumped 0.5% in June, matching May's drop. Industrial output rose at a 0.7% rate in the second quarter after falling at a 0.2% pace in the first three months of the year.

Capacity utilization for the industrial sector, a measure of how fully firms are using their resources, fell to 78.9% from

79.4% in May. It is 0.8 percentage point below its 1972–2022 average. The operating rate for the manufacturing sector slipped to 78.0% from 78.3% in May and is 0.2 percentage point below its long-run average.

(Reporting by Lucia Mutikani; Editing by Paul Simao)