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

U.S. businesses added more stock to their inventory in May than most economists had been expecting.

The U.S. Census Bureau reported Tuesday business inventories were up 0.5% month-over-month in May. They were also up 0.3% in April.

In the short-term, the May increase is good news — it means that despite higher interest rates, businesses feel confident enough about this economy to invest more in the stuff they sell — or the stuff that goes into whatever they sell. However, in the long term, things are a little more complicated.

An increase in inventory can be a good thing. But Christina DePasquale, who teaches economics at Johns Hopkins University, said sometimes the increase is unplanned, meaning businesses didn’t sell everything they wanted to sell, and their inventory grew unintentionally.

“That does mean that investment is increasing, which we will immediately see impact GDP in a positive way,” DePasquale said. “Oftentimes, that can be a signal of perhaps waning consumer demand, which then would be a negative impact on the economy down the road.”

But there are a bunch of other variables in this equation, said senior economist Meagan Schoenberger with KPMG.

“There’s also the fact that new tariffs went into effect in May,” Schoenberger said. “And so, there was a lot of stocking up of those affected products.”

Namely, products from China. She said auto dealers have also been adding inventory because they’re still playing catch-up after the pandemic supply chain debacle.

And if you’re already seeing Halloween decorations on the shelves, blame the weather.

“They’re expecting a record-breaking storm season, and that there’s going to be a lot more logistical problems,” Schoenberger said.

Businesses stocked up before the weather gets bad. So yes, an increase in inventory can spell bad news, but “I don’t necessarily know if there’s any red light flashing,” said John Quinterno, a public policy professor at Duke University.

Quinterno said business inventories have been depressed since the pandemic, but now, they’re “getting a little closer to where it was sort of pre-COVID, and it’s sort of in a range that I don’t think it’s unusual.”

Quinterno added broader concern about lasting economic implications of rising inventories is only warranted if the trend continues.