Inflation’s steady slowdown in recent months has kept Americans feeling optimistic about the future – and that’s lowering expectations about a recession, says N.C. State economist Dr. Mike Walden.

Consumer sentiment tracked by the University of Michigan rose 13% in July, the second straight month of improvement, according to a preliminary reading released Friday morning. The index reached its highest level since September 2021.

“Today’s reported rise in consumer confidence adds more fuel to the forecast that the economy will not sink into a traditional recession,” said Walden in an email to WRAL TechWire.” Clearly consumers are feeling better about the economic outlook, and in some ways, feelings outweigh data. This not to say consumers are being deceived.  The continuing gains in jobs, the rise in real (inflation-adjusted) wages, and the moderation in the inflation rate are a combination that should make consumers good.”

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The report showed that consumers’ expectations for inflation rates remained at their lowest levels since early 2021. Consumers see inflation rates of 3.4% in the year ahead, and while that’s well below last year’s 5.4% peak, it’s slightly higher than the previous reading.

“The sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labor markets,” said Joanne Hsu, director of the Surveys of Consumers, in a release Friday.

The survey showed a broad improvement across all of its components, “led by a 19% surge in long-term business conditions and 16% increase in short-run business conditions,” according to the release.

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Despite the Federal Reserve’s most aggressive rate-hiking campaign in decades, which was put on hold last month, the labor market has held remarkably steady while inflation has slowed, raising the odds of a so-called soft landing — or a scenario in which the Fed succeeds at bringing down inflation without throwing the economy off a cliff. Some Fed officials are confident about that possibility becoming a reality.

“I feel like we are on a golden path of avoiding recession,” Chicago Fed President Austan Goolsbee told CNBC last week.

Walden concurred.

“As we approach the second half of the year, chances of a recession are slipping fast.  If a recession does happen, it will be in early 2024.,” he said. “But by that time, the Fed will likely have taken their foot off the brake and may be even pushing slightly down on the gas – meaning lowering interest rates.  Even if the economy sputters in early 2024, it will likely be a very short pause, and not a plunge.  Bottom line – economic matters are looking better.”