WASHINGTON, August 15, 2008 (AFP) - US industrial production rose a tepid 0.2 percent in July, the Federal Reserve said Friday, but the increase beat market expectations as the embattled sector exhibits signs of recovery.

Most analysts had expected industrial output to be flat in July. The Fed lowered its June growth estimate to 0.4 percent from an initial 0.5 percent.

The industrial sector, like most other sectors in the economy, has been facing stiff headwinds from a prolonged housing slump, tight credit, and rising inflation and unemployment.

On a 12-month basis, industrial output fell 0.1 percent in July.

Industrial production capacity edged up to 79.9 percent, slightly better than analyst expectations of 79.8 percent. The Fed noted the July level was 1.1 percentage points below its average for 1972-2007.

Manufacturing production, excluding mines and utilities, accelerated to a 0.4 percent rise in July, boosted by a 3.6 percent rise in the production of motor vehicles and parts. In June it had climbed 0.1 percent.

Production in the mining sector advanced 0.9 percent in July, the same pace as the previous month. The energy sector's output fell 1.9 percent after a gain of 2.3 percent in June.

A regional report on manufacturing activity also came in better than expected.

The Federal Reserve Bank of New York's monthly Empire State survey of manufacturers in New York state found output increased 2.8 points in August following a 4.9-point decline in July. Analysts had forecast August output would drop 2.8 points.

'Manufacturing activity appears to be stabilizing. The New York region posted a gain and that was similar to what was seen in the national industrial production numbers,' said Joel Naroff of Naroff Economic Advisors.

'What seems to be occurring in a number of sectors is the cycle working its way through. Though few sectors other than agriculture and exporters are doing fine, we have to stop falling before we start rising,' he said.