There is a riddle in Friday’s economic data, and it is the kind of riddle that decides whether the Federal Reserve raises interest rates again in October.
Story one is about how you and I feel. The University of Michigan’s final consumer sentiment reading for September came in at 48.1, down from 51.7 in August, according to Reuters. That is a four-month low, and CNN notes it is the second-lowest reading on record in a survey that goes back to 1952. Americans feel worse about the economy now than during the 1970s oil crisis, 9/11, the Great Recession, and the pandemic. All four of the survey’s lowest readings have occurred within the past six months.
What is weighing on people is simple and painfully visible: prices. Consumers’ views of their current and year-ahead personal finances each weakened about 10% this month, and the survey’s measure of year-ahead inflation expectations jumped to 4.6% from 4.0% in August, after sitting at 3.4% in February before the U.S.-Israeli war with Iran began. “Obviously, the biggest factor is the higher gasoline prices and higher diesel prices,” Gus Faucher, chief economist at PNC Financial Services, told CNN. “People see that every day when they go to fill up their car.”
Story two is about what businesses are actually doing. New orders for durable goods, the big-ticket manufactured items meant to last three years or more, were virtually unchanged in August at $338.6 billion, according to the Commerce Department, via the Wall Street Journal. That beat economists’ expectations for a 0.3% decline. And the headline hides real strength underneath: core capital goods orders, the non-defense category excluding aircraft that serves as a proxy for business investment, shot up 1.6% in August after a 0.6% gain in July. That marks the 17th straight monthly increase in core orders, with core orders up 11.1% from a year ago, the strongest pace since the second quarter of 2022.
Why does that matter? Because shipments of those core goods are what plug directly into GDP. “Core orders are tracking very positively and core shipments point to double-digit annualized growth in business equipment spending in Q3 even after we account for the inflation impacts,” Nationwide financial markets economist Oren Klachkin said. Companies are still buying machinery, electrical equipment, and computers at a brisk clip, even with borrowing costs high.
A third report added to the mixed picture. The Kansas City Fed’s services survey came in flat at zero in September, up from minus 3 in August, with expectations for future activity rising to 12 from 5, Morningstar reported. Consumer services grew moderately, helped by transportation, while business services fell further. The same regional bank reported Thursday that manufacturing activity accelerated in September.
So here is the riddle for the Fed: consumers are this gloomy while business investment is this hot. People feel poorer because fuel and prices are up, but companies keep ordering equipment, which keeps jobs and wages humming, which can keep prices elevated. One silver lining, noted by the Michigan survey’s director Joanne Hsu: buying conditions for durable goods improved a bit, partly because consumers think buying now helps them avoid higher prices later.
For your own money, the takeaway is straightforward. Sentiment this low has historically been a better predictor of household stress than of recession, while business capex this strong is a better predictor of the economy’s actual direction. Watch what people do more than what they say. Businesses are still voting with their wallets.
