The economic recovery continued to show its muscle as the nation's industries operated at 75.8 percent of their capacity in July, the highest rate since 1981, the Federal Reserve Board reported yesterday.

The manufacturing industry also had a 75.8 percent capacity utilization rate, up from a low last November of 68.8 percent, fueled in part by a burst in output of the domestic auto industry. The utilization of auto plants was 77.3 percent, the highest rate in four years. The iron and steel industry rose to 61 percent after sinking to 38.8 percent last year.

The highest rate for the manufacturing, mining and utilities industries most recently was 88.4 percent in 1973. The low was 71.1 percent in 1975, the Fed said. The average during the business cycle between 1967 and 1982 was 82.4 percent.

While the July figure is below average for the business cycle, it does not reflect an abnormal recovery, a Fed spokesman said. Generally, the highest rate is about 90 percent, reached during wartime production.

The jump in use of the nation's industrial plants is in line with the 1.8 percent climb in industrial production and the nearly 500,000 increase in payroll employment last month, reflecting strong sales and the rebuilding of inventories depleted during the recession.

Increased production should mean higher corporate profits, "which should give corporations the wherewithal to step up spending," said Commerce Department chief economist Robert Ortner.

Although some of the improvement is due to a shrinkage of the capacity of some industries due to plant closings, most of the increase is due to increased output, Ortner said. For example, the auto industry experienced marked shrinkage since the second quarter last year.

"Some plants and equipment have been retired from production," Ortner said. However, the 7 percent improvement in utilization within the auto industry was "almost entirely from high output," Ortner said.

Capacity of the iron and steel, oil and textile industries also shrank between the second quarter of last year and the second quarter this year, while other industries such as chemicals and their products and rubber and plastics products grew.

The highest capacity utilization rate was for the paper and paper products industry, which used 93.0 percent of its capacity.