U.S. consumers are gradually becoming more optimistic

Michael Pearce, Deputy Chief U.S. Economist at Oxford Economics, now notes that there is evidence suggesting the so-called "vibecession"—the persistent negative sentiment surrounding the economy—appears to be ending.

A recent shift toward optimism

In a report released last Friday, Pearce wrote that with inflation cooling and the Federal Reserve preparing for rate cuts, Americans' outlook on the future is improving, aligning the country's economic conditions more closely with consumer confidence.

Other economists have also observed a recent shift toward optimism.

Brett House, economics professor at Columbia Business School, stated, "Consumer confidence seems to be catching up with the economy, and they're both moving toward a middle ground."

However, Pearce cautioned in his report that it's difficult to pinpoint exactly what's driving this shift in sentiment. He explained:

"Our best explanation is that people are responding with a lag to the news that inflation is falling and appears to be on a sustained path back to 2%. This may also reflect growing optimism as the Federal Reserve moves toward a clear path of rate cuts."

The recent economic data

Recent economic data has set the stage for the Fed to lower its benchmark interest rate for the first time in years.

The Fed’s preferred inflation gauge, the PCE price index, rose 2.5% year-over-year in July. Despite a rising unemployment rate over the past year, it remains low at 4.2%.

Greg McBride, Chief Financial Analyst at Bankrate.com, said, "All signs point to continued improvement in inflation, and the CPI data scheduled for release on Wednesday is expected to show further easing of inflationary pressures."

"Other inflation metrics—like the PCE price index and unit labor costs—are telling the same story and laying the groundwork for the Fed to begin cutting rates this month," he added.

According to the CME FedWatch tool, markets currently see a 100% chance that the Fed will cut rates at its September 17-18 meeting, with more aggressive action possible later this year.

Nailing the Long-Awaited Soft Landing

Meanwhile, the latest data shows consumer spending has performed better than expected.

Jack Kleinhenz, Chief Economist at the National Retail Federation, said in the NRF's September monthly economic review released last Friday, "U.S. consumers have proven to be quite resilient."

Kleinhenz noted that, despite earlier recession predictions, the U.S. has avoided an economic downturn. He explained, "The U.S. economy clearly isn't in a recession and is unlikely to enter one in the final stages of 2024. Instead, the economy seems poised to achieve the long-sought soft landing, with both growth and inflation cooling simultaneously."

Columbia University's House added that inflation progress and a still-strong labor market have created a "classic 'Goldilocks' scenario."

Fewer economists see the recession

Though some "recessionists" continue to warn of a significant economic slowdown, fewer economists now believe this will happen in the short term. Goldman Sachs recently lowered the probability of a recession from 25% to 20%, after previously raising it from 15%.

McBride said, "In 2023, this camp was very crowded, and for good reason, but the chances of a soft landing have steadily increased over the past 12 months."

Officially, the National Bureau of Economic Research defines a recession as "a significant decline in economic activity that is spread across the economy and lasts more than a few months." The last time this occurred was in early 2020, when the economy ground to a sudden halt. The U.S. has experienced over a dozen recessions in the past century, some lasting up to a year and a half.

House noted, "The thing about recessionists is that they will eventually be right at some point. Of course, the U.S. economy will enter a recession at some point in the future." He added that some level of economic disruption or adjustment happens with regularity, and the upcoming U.S. presidential election and potential policy shifts add another layer of uncertainty.

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