U.S. industrial output (search) in July posted its biggest gain since January, boosted by a big gain in utilities output and a third straight monthly rise in factory activity, the Federal Reserve (search) said Friday.

Production at factories, mines and utilities jumped a larger-than-expected 0.5 percent, the Fed said, its biggest rise since January's 0.7 percent gain. Firms also ran at a faster 74.5 percent of full capacity in July, up from 74.2 percent in June.

Wall Street analysts had expected production to post a 0.1 percent rise and the gauge of capacity use to come in at 74.3 percent.

In the report, factory activity, which accounts for almost 85 percent of total industrial production, rose 0.2 percent. Utilities output surged 3.9 percent as a warmer July spurred demand for electricity while production in the mining sector dipped 0.4 percent.

The report is the latest to show the hard-hit factory sector may finally be on the mend. In July, the Federal Reserve's anecdotal "beige book (search)" report on national economic conditions said there were "nascent signs" of recovery in manufacturing.

Factory managers have sliced payrolls to levels not seen since the late 1950s as firms squeeze more production out of current workers and equipment.

Economists are optimistic, though, that U.S. economic growth should pick up from the moderate 2.4 percent annual rate seen in the second quarter as the effects of a tax package passed by Congress in the spring make their way through the economy.

In Thursday's report, production outside of the high-tech sector rose 0.5 percent. Output excluding motor vehicles gained a smaller 0.3 percent. Auto assemblies rose to an annual rate of 12.15 million in July from June's 11.90 million, their second consecutive monthly gain.