Businesses Buy Like the Boom Is Real. Consumers Feel Worse Than Ever.

Friday delivered the economy's strangest split-screen in years. Businesses ordered equipment at a pace that tripled economists' expectations, powered by the AI infrastructure buildout. Consumers, meanwhile, reported feeling worse than at almost any point in modern American history — with inflation expectations climbing again just weeks after the Fed restarted rate hikes.

The Census Bureau's advance report showed total orders for durable goods — products meant to last three years or more — were virtually unchanged in August at $338.6 billion, down a rounding-error $100 million from July. Economists polled by The Wall Street Journal had expected a 0.3% decline, so the flat print was a modest beat. July's gain was revised down to 0.9% from 1.1%.

Transportation equipment was the drag. Orders for the category fell 0.6% and have now declined in three of the last four months, with nondefense aircraft down 4.3% and motor vehicles and parts off 0.6%, according to market commentary cross-checking the Census tables. Excluding transportation, orders still rose 0.3%; excluding defense, they were up 0.1%.

The headline masked the real story. Nondefense capital goods orders excluding aircraft — the closely watched proxy for business capex plans — jumped 1.6% in August, triple the 0.5% consensus in the Reuters poll. July was revised sharply upward, to a 0.6% gain from a previously reported flat reading.

Core shipments also firmed, rising 0.6% after a 1.4% July advance. Shipments of core capital goods feed directly into the equipment-spending component of GDP, so the back-to-back gains point to another quarter of robust business investment.

The AI engine

The equipment boom is an AI story. Machinery orders rose 1.1% on the month and 15.1% from a year earlier to $45.5 billion — a print with data-center buildout written all over it, in the words of Wolf Street's table-by-table read of the release. Electrical equipment, components and appliances jumped 1.1% on the month and 7.6% year-over-year to $19 billion, capturing much of the power gear that goes into AI facilities. Computer and electronic products were flat on the month at $31 billion but up 16.5% from a year ago, including orders for semiconductors at US-located fabs.

Reuters reported that business spending on equipment has now posted two straight quarters of double-digit growth, underpinning manufacturing and the broader economy — but added economists' caution that segments not tied to AI could slow against rising oil prices, interest rates and long Treasury yields.

The pipeline stayed full. Unfilled orders rose another 0.6% and inventories climbed 0.5% for an eleventh consecutive month, even as total durable-goods shipments slipped 0.2%, ending an eight-month run of increases.

Consumers at the edge

The soft data told the opposite story. The University of Michigan's consumer sentiment index fell to 48.1 in the final September reading, down 7% from August and nearly 13% from a year ago. The survey dates to 1952, and Friday's print was the second-lowest ever recorded. All four of the index's worst readings have now arrived within the past six months, with the record set in May.

Americans now report feeling worse about the economy than they did during the 1970s oil crisis, 9/11, the Great Recession, the Covid-19 pandemic or the inflation surge that followed, CNN noted in its coverage of the release. The Current Economic Conditions index edged down to 50.9 while the Expectations index dropped to 46.3, and views of personal finances weakened about 10% in a single month — down 15% since January.

Inflation expectations moved the wrong way for a central bank that just restarted hiking. Year-ahead expectations jumped to 4.6% from 4.0% in August, the highest since June and well above the 3.4% reading from February, before the Iran conflict began. Long-run expectations ticked up to 3.4%, ending three straight months at 3.3% and sitting above their entire 2024 range of 2.8% to 3.2%.

The Fed's problem

The Federal Reserve watches inflation expectations closely, and it hiked interest rates earlier this month for the first time in three years. Re-accelerating one-year expectations at 4.6% while long-run expectations drift upward is the combination that keeps further hikes on the table.

The gloom is bipartisan. "Overall, interviews reveal broad agreement across the political spectrum that the outlook for the economy has weakened since the beginning of the year," said Joanne Hsu, director of the university's Surveys of Consumers. "After particularly large declines in sentiment this month, Republican sentiment is now 20% lower than January 2026; Democrats are down 13% over the same period."

Gas prices are the most visible culprit. "Obviously, the biggest factor is the higher gasoline prices and higher diesel prices," Gus Faucher, chief economist at PNC Financial Services Group, told CNN. "People see that every day when they go to fill up their car." Faucher added that inflation "has picked up over the past year or so because of tariffs and now the conflict in Iran," and that the conflict's end "does not appear imminent."

The wedge is the story: corporate America is spending like the AI boom is real, booking orders at a pace not seen in years. Consumers are living a different economy — one of pump prices, tariff costs and a 48.1 sentiment print that ranks among the worst in three generations of polling. Whether the Fed spends more time worrying about the spending or the sentiment will define the next several meetings.