updated 9/14/2010 11:13:18 AM ET 2010-09-14T15:13:18

Inventories held by businesses jumped in July by the largest amount in two years while sales rebounded after two months of declines.

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Business inventories rose 1 percent in July, the biggest monthly gain since a similar increase in July 2008, the Commerce Department reported Tuesday. Inventories have grown for seven consecutive months.

Total business sales were up 0.7 percent in July after falling 0.5 percent in June and 1.2 percent in May.

The rebound in sales was an encouraging sign that consumer demand is rising after the two weak months. Businesses build up their stocks when they anticipate stronger retail demand.

Inventory growth helped drive economic expansion in the final quarter of 2009 and early this year. Many businesses replenished their stockpiles after slashing them during the recession. That led to rising orders at American factories and helped lead the early stages of the modest economic recovery.

For July, sales were up 1.1 percent at the manufacturing level with smaller gains at the wholesale and retail levels. A separate report Tuesday showed that retail sales increased in August by the largest amount since March, another encouraging sign that consumers are beginning to spend again.

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The big jump in inventories in July might not have been voluntary. Businesses may have been caught with some unwanted stockpiles with the unexpected slowdown in sales in the previous two months. However, the hope is that sales will keep growing in coming months and this will spur businesses to continue stocking their shelves in anticipation of further gains in demand.

Even with the increase in inventories, the ratio of inventories to sales remains well below normal levels. In July, the inventory to sale ratio stood at 1.26, meaning it wold take 1.26 months to deplete existing inventories at the July sales pace. That was up only slightly from the low point over the past decade of 1.23 months hit in April and March of this year.

Inventories had surged to a decade high of 1.46 months in March 2009 before businesses were caught with unwanted stockpiles.

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