Industrial production at the nation's factories, mines and utilities edged down by just 0.1 percent in July, a possible sign that better days may be ahead for the beleaguered sector.

While the reduction was smaller than the 0.3 percent drop many analysts had forecast, it still marked the 10th monthly decline in a row, the Federal Reserve reported Wednesday. In June, output plunged by 0.9 percent, weaker than the Fed estimated a month ago.

Last month's decline was the best performance since output edged up by 0.2 percent in September -- the month before the steady slide began.

In another report, businesses showed progress whittling inventories of unsold goods in June even as sales fell by the largest amount in nine years.

The Commerce Department said supplies on shelves and backlots declined by a seasonally adjusted 0.4 percent in June, the largest drop in three months. That came after business pared inventories by 0.2 percent in May. Inventories have fallen for five months in a row.

Sales, however, plunged by 1.4 percent in June, after posting a 0.9 percent increase the month before. June's sales decline marked the largest drop since a 1.5 percent decrease in August of 1992.

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.

The yearlong economic slowdown has curbed Americans' appetite for goods, causing an inventory pileup. To reduce inventories, companies have laid off workers, reduced shifts and deeply discounted merchandise.

Economists say companies must pare excess stocks in order to lay the foundation for increased production in the future, something that would bode well for a comeback for the overall economy.

To avert a recession, the Federal Reserve has slashed interest rates six times this year, totaling 2.75 percentage points. Many economists predict another rate cut when the Fed meets Tuesday.

The industrial production report showed that manufacturing output was flat in July, after a sharp 1 percent drop. Output at utilities fell by 0.5 percent, after rising 1 percent in June. At mines, production declined by 0.6 percent, after a 0.7 percent drop.

Operating capacity sank to 77 percent in July, its lowest point since August 1983, as companies throttled back production in the face of sagging demand.

In the inventories report, the drop in June's sales lifted the inventory-to-sales ratio, which measures how long it would take businesses to exhaust their inventories, to 1.43 months, the highest level since April.

In June, inventories at factories, which have been hardest hit by the slowdown, declined by 0.7 percent, following a 0.6 percent drop the month before. But sales in June plunged by 2.8 percent, after a 2.4 percent increase.

Retailers' inventories decreased by 0.3 percent, after being flat in May. Sales slipped by 0.1 percent, erasing a 0.1 percent advance the month before.

At wholesalers, inventories edged down 0.2 percent, following a 0.3 percent rise. Sales fell by 0.9 percent, after a 0.5 percent decline.

Automobile dealers' inventories dipped by 0.2 percent in June, following a 0.3 percent gain in May.