Redstone Ontop of Observer Output Cannot Power Solid Blocks with Dust ontop of them

Essentially if I were to place a Redstone Dust on top of an Observer with its output facing upwards, it couldn't power any solid blocks next to it that have Redstone Dust on top. This is shown in the attached pictures in how the first setup works and the second doesn't.

EDIT: Only happens when the dust is powered by the Observer.