"The recession theory" is shattered by data! Is it now best to bet on a soft landing for the U.S. economy?

Wall Street's recent predictions of an economic recession have been severely hit this week, as data on employment, consumer spending, inflation, and small business optimism all point to steady growth in the economy in the coming months.

Data released by the U.S. Department of Commerce on Thursday showed that retail sales in July increased by 1%, marking the largest monthly gain in over two years. Consumers spent over $709 billion on a variety of goods including automobiles, appliances, food, and clothing.

The stronger-than-expected data corroborates the optimistic forecasts of the world's largest retailer, Walmart. Walmart reported slightly higher sales in the second quarter at over $169 billion and raised its full-year profit forecast, stating that it continued to see a robust spending trend in the first two weeks of August. Walmart CEO Doug McMillon stated, "We see that our members and customers are still savvy, value-focused, and focused on necessities rather than discretionary items. Importantly, we have not seen any further deterioration in consumer health."

Meanwhile, data from the U.S. Department of Labor on weekly jobless claims showed a decrease of 7,000 to 227,000, well below Wall Street's expectations, which may alleviate concerns about a slowdown in the labor market.

Earlier this week, a key measure of small business optimism released by the National Federation of Independent Business (NFIB) hit its highest level in two years, while last week, the Institute for Supply Management's (ISM) July service sector activity data expanded for the fifth consecutive month this year.

Overall, these data points challenge Wall Street's recent predictions of an economic recession, which were partly based on last month's non-farm payroll report and concerns about a slowdown in hiring in the second half of 2024. Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance, stated:

"Retail sales data significantly exceeded expectations, but more importantly, it should at least temporarily dispel all the doomsday scenarios that were circulating in the market earlier this month."

Economists are increasingly concerned that the Fed's rate hikes will continue to dampen broader economic growth.

However, with the U.S. Department of Commerce reporting that the July Consumer Price Index (CPI) has fallen below 3% for the first time in over three years, bets on a Fed rate cut in September have quickly increased.

At the same time, the Atlanta Fed's GDPNow forecasting tool shows that the U.S. economy is expected to grow at 2.4% this quarter, lower than the previous forecast of 2.9%, mainly due to changes in private inventories. The U.S. Department of Commerce's estimate of economic growth for the three months ending in June was finally set at 2.8%.

"If the economy continues to show resilience, especially with inflation easing, then the Fed can start a rate-cutting cycle without the economy falling into a recession, historically, this is a very positive environment for the stock market," Zaccarelli said Following the release of retail sales and unemployment claims data, the US stock market surged, with the S&P 500 index turning positive for the quarter and rising to its highest level since July 19.

Perhaps more importantly, the Volatility Index (VIX) from the Chicago Board Options Exchange (CBOE) fell to its lowest level in over a month.

"We are back to a good news is good news, bad news is bad news environment. Investors and consumers want inflation to come down, but not at the expense of the economy," said Brent Kenwell, a US investment analyst at eToro. "Today's retail sales data, stronger than expected, alleviated some concerns about the US potentially entering a recession."

However, data from the manufacturing sector continues to indicate that the spring weakness may persist into the summer and beyond.

According to data released by the US Department of Commerce on Thursday, industrial production and manufacturing output both declined last month, while indices tracking activity in New York and the mid-Atlantic region in August showed mixed results.

"The most important thing here is that the manufacturing conditions have improved compared to the beginning of the year, but to say that these surveys now point to a clear recovery is a bit of a stretch," said Ian Shepherdson of Pantheon Macroeconomics. "Monetary policy remains very tight, especially for small businesses, with global demand rising only slowly."

Investors may now shift their focus to a series of events in late August, which will clarify the interest rate path the Federal Reserve may take and gauge market sentiment towards one of the most important stocks.

Federal Reserve Chairman Powell will deliver a keynote speech at the central bank's annual symposium in Jackson Hole, Wyoming on August 24, while the Fed's preferred inflation gauge, the PCE Price Index, will be released on August 29.

Additionally, Nvidia is set to announce its highly anticipated second-quarter earnings, which will undoubtedly serve as a barometer for tech spending forecasts and overall market sentiment as the market enters the final months of the year