NEW YORK (CNN/Money) - Suddenly, the economy doesn't look all that bad.

Wall Streeters were a bit dazed Friday morning to see March retail sales come in far better than expected. The Commerce Department said sales lifted by 2.1 percent, way better than the 0.6 percent economists polled by Reuters expected, and a sharp snapback from February's 1.3 percent drop. Take away autos, and sales still popped 1.1 percent.

This was supposed to be a dismal report with war, lousy weather, the late Easter and high pump prices all knocked the stuffing out of U.S. consumers. After muddling through most of the week, stocks were set to spring.

"Maybe the psychology is changing," said Jim Volk, director of institutional trading at D.A. Davidson. "Maybe we get a little courage back here."

Most data suggest the economy suffered a big setback during the last two months, setting Wall Street wondering whether, even with the war in Iraq coming to a close, there might be a slide into recession. The good news on sales set traders thinking that maybe the economy will be able to make a comeback.

The University of Michigan Sentiment Index, due out at 9:45 a.m. ET or so, may reinforce that sense. Economists forecast it picked up fractionally, to 78.1 from March's final reading of 77.6, but there's talk that it could go much higher than that.

Miller Tabak bond market strategist Tony Crescenzi points out that the ABC News/Money magazine consumer confidence index rose to negative 22 in the week ended Sunday, up from a reading of negative 26 the prior week, and that Thursday's weekly jobless claims report came in better than expected. Both suggest to him that the U of M index could surprise to the upside.  

-- Justin Lahart is a senior writer at CNN/Money covering markets and investing.