WASHINGTON (Reuters) - Production at U.S. factories increased more than expected in June, contributing to a solid rebound in output in the second quarter, though higher borrowing costs remain a constraint for the manufacturing industry.

Factory output rose 0.4% last month following an upwardly revised 1.0% increase in May, the Federal Reserve said on Wednesday. Economists polled by Reuters had forecast factory output would advance 0.2% after a previously reported 0.9% jump in May. Production at factories shot up 1.1% on a year-on-year basis in June.

It increased at a 3.4% annualized rate in the second quarter, rebounding from the 1.3% pace of decline in the January-March quarter.

Manufacturing, which accounts for 10.4% of the economy, has at best been treading water as higher interest rates curb demand for goods and make capital investment challenging.

There is, however, optimism that activity at factories could pick up, with the U.S. central bank expected to start its monetary policy easing cycle in September amid subsiding inflation.

Motor vehicle and parts output rose 1.6% last month after being unchanged in May. Durable goods manufacturing production was unchanged. Increases in the output of motor vehicles and parts as well as electrical equipment, appliances and components were offset by declines in fabricated metal products and miscellaneous goods.

Nondurable manufacturing production increased 0.8%.

Mining output rose 0.3% after falling 0.7% in May. Utilities production increased 2.8%. That followed a 1.9% rise in the prior month. Overall industrial production advanced 0.6% in June after gaining 0.9% in May.

Industrial production rose 1.6% on a year-on-year basis in June. It increased at a 4.3% rate in the second quarter.

Capacity utilization for the industrial sector, a measure of how fully firms are using their resources, rose to 78.8% from 78.3% in May. It is nine-tenths of a percentage point below its 1972-2023 average. The operating rate for the manufacturing sector climbed to 77.9 from 77.6% in the prior month. It is four-tenths of a percentage point below its long-run average.