What does it mean for the economy when businesses grow their inventory?

U.S. businesses added more stock to their inventories in May than most economists expected.

The The U.S. Census Bureau reported Tuesday Commercial inventories rose 0.5% month-over-month in May. They rose 0.3% in April.

In the short term, May’s increase is good news — it means that despite high interest rates, businesses are confident enough about this economy to invest more in the goods they sell — or go into the goods they sell. However, in the long run, things are a little more complicated.

An increase in balance is a good thing. But Cristina DePasquale, who teaches economics at Johns Hopkins University, said sometimes the increase was unplanned, meaning businesses didn’t sell all they wanted to sell, and their inventories grew by accident.

„It means that investment is increasing, and we will immediately see the impact on GDP in a positive way,” DePasquale said. „Most likely, this could be a signal of declining consumer demand, which could have a negative impact on the economy down the road.”

But there are other variables in the equation, said Meagan Schoenberger, senior economist with KPMG.

„The new fees went into effect in May,” Schoenberger said. „So, there was a lot of inventory of that affected product.”

That is, products from China. Auto dealers are also adding inventory as they are still playing catch-up after the pandemic supply chain disruption, he said.

If you’re already looking at Halloween decorations on the shelves, blame the weather.

„They’re expecting a record storm season, and there’s going to be a lot of logistical issues,” Schoenberger said.

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Businesses piled in before the weather worsened. Yes, an increase in inventories could spell bad news, but „I don’t know if any red light is flashing,” said Duke University public policy professor John Quinterno.

Commercial inventories have been depressed since the pandemic, but now, ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ending Thursday evening.

Quinterno added to broader concerns about the lingering economic implications of rising inventories, which are only warranted if the trend continues.

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