But their stockpiles of unsold goods (inventory levels) also fell, reflecting the fact that many firms had cut back on their spending because of the slowing economy.

The slide in industrial production figures slowed, according to a report from the Federal Reserve, with factory output flat rather than falling for the first time since September 2000.

According to the Commerce Department report, inventory levels shrank 0.4% to $1,189.6bn compared to a drop of 0.2% the previous month, and more than the 0.3% expected by Wall Street economists.

Meanwhile June sales dropped 1.4% to $829.2bn, its largest decline since a 1.5% drop in August 1992. The fall came after rising 0.9% in May.

The stock-to-sales ratio, which measures how long it would take for a company to sell its existing inventories, stood at 1.43 months' worth, up from 1.42 in May.

Production decline slows

Overall industrial output dropped 0.1% in July, the Fed report said, after falling a revised 0.9% in June.

Factory output, which makes up most of the overall figure, was unmoved month on month in July. June's 1% fall was the 10th successive monthly slippage.

The figures were better than economists had expected, and were led by an improvement in automobile production.

But although capacity utilisation also proved better than feared, the 77% rate, down from 77.2% in June, still set a 18-year low.

And aside from the motor trade, factory output was disappointing, with production of high-tech items in particular falling sharply.

Markets underwhelmed

The news was met with mixed reviews by US markets.

By 1525 GMT, the Dow Jones index had lost early gains and was up just 3.05 points or 0.03% to 10,415.22, having drifted slightly lower through the week so far.

The tech-heavy Nasdaq Composite index was down 22.76 points or 1.2% to 1,941.77, while the Standard & Poor's 500 index lost 2.67 or 0.2% to 1,184.06.

The falling inventories are the result of the reaction of manufacturers across the US to the economic slowdown.

Among the first signs of the US woes were huge inventories at technology companies, much of which has been written off as part of the multi-billion dollar losses recorded in recent earnings reports.

Rate cut hopes rekindled

But the figures still indicate that there is some way to go before stocks come back into step with sales.