Extracting shared structure across our experiences allows us to generalize our knowledge to novel contexts. How do different brain states influence this ability to generalize? Using a novel category learning paradigm, we assess the effect of both sleep and time of day on generalization that depends on the flexible integration of recent information. Counter to our expectations, we found no evidence that this form of generalization is better after a night of sleep relative to a day awake. Instead, we observed an effect of time of day, with better generalization in the morning than the evening. This effect also manifested as increased false memory for generalized information. In a nap experiment, we found that generalization did not benefit from having slept recently, suggesting a role for circadian rhythms apart from sleep. We found, however, that this time of day effect appears to be sensitive to category structure and to task engagement more generally. We propose that a state of lowered inhibition in the morning may facilitate spreading activation between otherwise separate memories, promoting this form of generalization.