Should engine run cooler when AC is engaged?

No electric fans - have a heavy duty clutch fan and shroud. So you guys figure it's a faulty reading?

NO the reading on the gauge is correct. The thermostat on the fan clutch has a bimetal spring on the front that controls the rate of resistance in the clutch. The hotter the temperature gets, the more resistance the bimetal spring gives the clutch making the fan spin harder and pull more air through the radiator core. You are describing correct operation.