NEW YORK (CNN/Money) - Industrial production fell in the United States last month, the Federal Reserve said Tuesday, as the manufacturing sector lost strength amid a sluggish recovery in the broader economy.

The Federal Reserve said production fell 0.3 percent in August after rising a revised 0.4 percent in July, while factories used just 76 percent of capacity, compared with a revised 76.2 percent in July. Economists, on average, expected production to rise 0.2 percent and capacity use of 76.1 percent in August, according to Briefing.com.

Some economists noted that much of August's decline was due to a big drop in automobile production, as automakers cleared out 2002-model inventories to make room for 2003-model vehicles. Meanwhile, unseasonably cool weather reduced demand for electricity output, one component of the report.

"This was a temporary pause, which has already been reversed in the month of September," said Sung Won Sohn, chief economist at Wells Fargo & Co.

U.S. stock prices opened higher, encouraged by the news that Iraq had agreed to admit United Nations weapons inspectors to make sure it had no weapons of mass destruction, while Treasury bond prices fell.

It was the first decline in industrial production since December 2001, and it helped to demonstrate that the economy's recovery from a recession that began in March 2001 has been spotty at best.

Some economists have feared, in fact, that the economy could "double dip" into another recession. Though most economists dismiss this fear, there is still a slim chance that Fed policy makers could decide to cut their target for short-term interest rates next week in a bid to protect against further deterioration.

The central bank's policy makers, who meet next Tuesday, have held rates steady so far this year after cutting them 11 times last year in a bid to spur growth.

In its industrial production report, the Fed said that production of motor vehicles and parts fell 1.4 percent after gaining 3.9 percent in both June and July.

Consumer goods production fell 0.5 percent last month, the first drop since a 0.3 percent decline in April. Business equipment production fell 0.4 percent after falling 0.3 percent in July.

Manufacturing production fell 0.1 percent, the first drop since a 0.3 percent decline in December 2001. Durable goods production was flat, the worst performance since a 0.1 percent drop in December.

Manufacturing entered a prolonged slump in late 2000, after businesses abruptly stopped spending in the wake of a spending boom in the late 1990s. More than 1.5 million job cuts and a broader recession followed, and many economists -- including Fed Chairman Alan Greenspan -- have said businesses will have to start spending again if the recovery is to take hold.