American consumers haven't felt this good about the economy since September 2021.
Stocks are higher, with some strategists even suggesting a record-setting year for the S&P 500. Inflation has fallen from north of 9% to 3%, according to one metric. And all of this, while the US labor market remains tight with a historically low unemployment rate.
Friday's preliminary July reading of the University of Michigan's Consumer Sentiment Index reflected the recent positive signs, with the index's 13% jump from June marking the largest monthly increase since 2005.
But the positive vibes aren't in line with what economists believe recent data is telling us about the US economic outlook moving forward.
"It is important to avoid reading too deeply into the details of a single month's report," warned Jefferies US economist Thomas Simons on Friday.
He continued: "We remain steadfast in the view that the economy is going to take a turn for the worse within the coming months, but it seems that consumers are becoming more sanguine and buying into the soft-landing or 'no-landing' narratives, at least for now."
The narrative of a soft landing Simons references has become more prevalent as economic data has largely surprised economists to the upside recently and stocks have rallied to begin second-quarter earnings season. Last week, consumer prices increased at their slowest pace since March 2021 while producer prices showed similar signs of cooling inflation.
In the labor market, weekly jobless claims of 237,000 came in lower than expectations for 250,000 claims. Meanwhile, the recent June Jobs report showed some slowing from previous months but still revealed 209,000 jobs, the unemployment ticked lower to 3.6%, and average hourly earnings grew 4.4% from the year prior.
In reaction to the compilation of data, Wells Fargo's economics team wrote, "Better than expected doesn't mean all is well." The economics group at Bank of America's Global Research said it's "encouraged but not carried away."
"Since our prior outlook in June, our expectations for the U.S. economy have not materially changed," Wells Fargo's team led by chief economist Jay Bryson wrote in a monthly update on Thursday. "We continue to believe that the Federal Reserve's efforts to restore inflation back to 2% will slowly squeeze household and business spending, generating a mild downturn early next year."
The case that a recession still looms is based on slowing consumer spending, the lagging impacts of monetary policy, and a belief that, while inflation is cooling, the path for the final one-percentage-point decline in headline inflation to meet the Fed's 2% goal will be much longer than the past year's precipitous fall.
"We think it is too early for the Fed to declare victory on inflation," BofA US economist Michael Gapen wrote. "Despite the significant softening in the CPI and PPI, our core PCE inflation forecast for June still annualizes to 2.4%, or 40bp above the Fed’s target."
Wells Fargo notes that slowing disinflation combined with the softening jobs market, will weaken disposable income in the coming months. Eventually, that will lead to slowing growth and a "mild recession" in early 2024.
"Consumers are running out of steam," the team wrote.
Josh Schafer is a reporter for Yahoo Finance.
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