Markets Weigh Business Strength Against Consumer Weakness

by Brent Schutte of Northwestern Mutual Wealth Management, 8/26/26

Markets Weigh Business Strength Against Consumer Weakness

Key takeaways

  • Business activity remains resilient, with services and employment growth helping support the broader economy.

  • Higher medium- and longer-term interest rates are creating new risks for consumers, housing, and financial markets.

  • Strong investment tied to artificial intelligence continues to support growth, but rising borrowing costs could challenge the durability of that spending cycle.

Equity markets stumbled this week despite an economic backdrop that continues to show signs of broadening. While concerns about consumer strain are mounting, those worries have so far been offset by ongoing strength in business investment, particularly spending tied to artificial intelligence (AI). The dominant financial market story this week, however, centered on rising debt levels and the accompanying increase in U.S. medium- and longer-term interest rates. Ironically, the AI boom itself is contributing to that rise. The significant capital required to fund AI-related investment is increasingly being financed through debt issuance, forcing investors to absorb both a growing supply of corporate debt and ever-larger amounts of U.S. Treasury issuance. After hitting 3.94 percent on February 27, 2026, the 10-year Treasury yield continued its climb this week, reaching 4.73 percent, its highest level since January 2025. The 30-year Treasury yield rose to its highest level since June 2007.

The move higher in rates has attracted the attention not only of investors but also of U.S. Treasury Secretary Scott Bessent. On Wednesday, the U.S. Treasury announced it was doubling the size of its buybacks of longer-term Treasurys, increasing purchases in the 10- to 30-year segments from $2 billion to $4 billion. While yields initially declined following the announcement, they reversed course and moved higher again on Thursday. That occurred despite Bessent’s appearance on CNBC, where he said the operation was intended to signal that the market for longer-term securities needed additional liquidity and that current yields were not “reflective of fundamentals.” He also noted that buybacks could exceed $4 billion and emphasized that the Treasury Department had a “big toolkit.” At the same time, he announced that President Trump had tasked him and Office of Management and Budget Director Russ Vought with a new initiative focused on fiscal consolidation. According to Bessent, there is a “very good chance we have seen the peak in fiscal deficits.”

These efforts follow other recent actions by the Treasury Department that appear designed to keep a lid on longer-term interest rates. Most recently, the United States participated in a coordinated operation with Japan to support the yen. As the largest foreign holder of U.S. Treasurys, Japan's need to defend its currency can create selling pressure in Treasury markets as it raises dollars to purchase yen. Supporting the yen may therefore help reduce the likelihood that Japan will need to sell Treasury holdings. Additionally, Treasury Secretary Bessent has been a strong advocate for stablecoins, a position many observers view in the context of the fact that stablecoin reserves are generally invested in short-term Treasurys.

The increased focus on rates highlights their growing importance at a time when gross U.S. government debt has surpassed $40 trillion and net interest payments have risen to more than $931 billion during the first 10 months of the current fiscal year. With the Federal Reserve expected to raise, rather than lower, interest rates, concerns are growing about the future path of borrowing costs and the implications for both the economy and financial markets. Those concerns are especially relevant given that higher rates and elevated inflation have already weighed on consumers and the housing market. They also raise questions about the durability of the AI investment boom, which requires substantial amounts of capital at a time when that capital is becoming increasingly expensive.

Against this backdrop, economic data released this week continued to point to a resilient U.S. economy. The S&P Global U.S. Purchasing Managers' Index (PMI) rose to its highest level since April 2022, supported by strong employment growth and moderating (though still elevated) price pressures. Industrial production data showed manufacturing output increasing 0.2 percent month over month and climbing to within 0.3 percent of its March 2022 peak, before the sharp rise in interest rates. The improvement was broad based, with 11 of 18 manufacturing groups posting gains. However, the strongest growth continued to come from business equipment tied to AI. Output in that category rose 0.8 percent month over month and is now up 6.6 percent year over year. Demand for computers and electronics remained particularly strong, with production increasing 1.9 percent month over month and standing 9.9 percent above year-ago levels. In contrast, consumer goods production fell 0.4 percent month over month, leaving year-over-year growth at -1.8 percent.

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