Businesses' inventories of unsold goods were flat in May as sales registered the biggest increase in more than a year. 

The Commerce Department's report Monday provided fresh evidence that businesses, coping with the economic slowdown, are making progress in whittling excess supplies to bring them closer to demand. 

Inventories of unsold goods on shelves and backlots were flat in May, following a 0.2 percent drop in April. 

Sales jumped by 1.1 percent, the biggest gain since 1.9 percent in March 2000. In April, sales fell by 0.5 percent. 

On Wall Street, stocks fell as the inventories report and better-than-expected earnings from two banks failed to generate any enthusiasm among investors. At midday, the Dow Jones industrial average was down 3 points and the Nasdaq index was down 19 points. 

When the economy began to slow sharply last year, inventories of unsold goods started to pile up. Companies have been working hard to pare them down. Economists say that must be done to lay a foundation for increased production in the future, something that would bode well for a comeback for the overall economy. 

Federal Reserve Chairman Alan Greenspan has attributed much of the economy's weakness to an effort by businesses to cut back quickly on production to bring inventories back in line with sales. 

To reduce inventories, companies have laid off workers, reduced shifts to curb production and deeply discounted merchandise. 

The Federal Reserve slashed interest rates six times this year in an effort to stave off recession. Economists believe the Fed is likely to cut rates in August. 

Monday's report also showed that the inventory-to-sales ratio, which measures how long it would take businesses to exhaust their inventories at May's sales pace dipped to 1.42 months in May from 1.44 in May. 

In May, inventories at factories fell by 0.3 percent, following a 0.2 percent decline the month before. Sales in May rose by a strong 2.6 percent, after a 2.4 percent drop. 

Automobile dealers' inventories rose by 0.5 percent, following a 0.1 percent decline in April. 

Retailers' inventories rose by 0.4 percent, after a 0.3 percent decrease in April. Sales were up by 0.3 percent, following a 1.5 percent increase the month before. 

Inventories of furniture, home furnishings and electronics and appliances slipped by 0.1 percent in May, on top of a 0.2 percent decline in April. 

For companies that sell building materials and gardens supplies, inventories rose by 0.5 percent, following a 0.2 percent dip in April. 

At wholesalers, inventories edged up 0.2 percent, following a 0.1 percent rise. Sales dipped by 0.1 percent in May, after rising by 0.1 percent in April.