Inventories of unsold goods held by U.S. businesses in February registered the biggest decline in almost five years.
The Commerce Department reported that stocks of goods on shelves and backlots fell by 0.2 percent to a seasonally adjusted $1.22 trillion.
The decline was the first since December 1998, when inventories were reduced by 0.1 percent, and the largest drop since a 0.3 percent decline in March 1996.
February's decline in inventories came even as sales slid by 0.3 percent to $892.1 billion.
The report shows that businesses are making progress working off excess stocks, which piled up as the economy slowed sharply starting in the second half of last year.
In January, inventories ticked up a tiny 0.1 percent and sales fell by 0.2 percent, according to revised figures.
Friday's report also said that the inventory-to-sales ratio, which measures how long it would take businesses to exhaust their inventories at February's sales pace, was unchanged at 1.37 months. The ratio rose to 1.37 months in January, the highest since March 1999.
Consumers' and businesses' appetite for goods has flagged as the economy has slowed. To work off inventories and bring them more in line with demand, companies are laying off workers, reducing shifts to curb production and deeply discounting merchandise.
Federal Reserve Chairman Alan Greenspan has attributed much of the economy's weakness to an effort by businesses to cut back quickly on production in the face of falling sales.
The Federal Reserve slashed interest rates three times this year, totaling 1.5 percentage points, in an effort to keep the ailing economy from slipping into recession.
Many analysts expect Fed policy-makers will cut interest rates a fourth time by another half-point either before or at their next scheduled meeting on May 15.
In February, retailers' inventories fell by 0.4 percent to $397.5 billion, following a 0.2 percent rise in January. Sales were flat in February at $274.8 billion after a 1.3 percent increase the month before.
Inventories at factories slipped 0.1 percent $ 494.9 billion after a 0.5 percent advance the month before. Sales in February fell 0.5 percent to $364.5 billion, after a 1.6 percent decline.
At wholesalers, inventories ticked down 0.1 percent to $327 billion, following a 0.4 percent decline. Sales fell 0.2 percent to $252.8 billion, after an 0.1 percent increase
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