Last week, we learned that the unemployment rate fell to 10.2% in July. This week, initial claims for unemployment insurance fell below one million for the first time since March, and retail sales eclipsed the pre-pandemic levels seen earlier this year. With so much seemingly moving in the right direction, and COVID-19 case growth decelerating, is it premature to assume that we are out of the woods?

The short answer, is yes. While we are seeing signs that the labor market continues to recover, the unemployment rate remains elevated. Furthermore, some of the improvement in jobless claims during the past few weeks may have to do with the expiration of the 600 USD/week supplement, as this could have led filing for benefits to look less attractive. At the same time, the decline in continuing claims could be driven by individuals exhausting their eligibility, and other measures of employment like the Census Bureau’s Household Pulse Survey continue to suggest that the labor market remains under pressure.

The conflicting nature of these labor market reports might lead an investor to look at consumer spending in an effort to gauge the state of the economy. While the July bounce in retail sales pushed them above their prior peak, this report is more heavily weighted towards goods than services. Given that the current downturn is far more concentrated in services, this report may not be the most accurate representation of where things currently stand. 

However, we can take some comfort in how goods spending has bounced back over the past few months. With many manufacturing facilities closed in April and May, inventories have been drawn down, and as a result, we would expect that manufacturing and goods production more broadly will help support economic growth into the end of the year. That said, inventories tend to be a big swing factor for GDP; in the short-term, this will work in the economy’s favor, but over time, the baton will need to be passed to services in order for growth to stabilize in line with its long-run trend. The bottom line is that we are making progress on the road to recovery, but by no means are we nearing the final leg of the journey. With the U.S. equity markets flirting with an all-time high, this suggests a bit of near-term caution may be warranted.

Claims have dropped below 1 million for the first time since March 

Initial claims for unemployment insurance, thousands, sa 

Source: Department of Labor, FactSet, J.P. Morgan Asset Management.

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