How Durable Is the Economic Recovery?

The pandemic remains under control at the national level, and the case growth rate remains below recent peaks. Still, the medical news continues to get worse, as this past week has seen case growth continue to rise on a seven-day average basis. While some of this rise may be due to increased testing, most looks to be owing to widening outbreaks in many states. In fact, case growth in many states is starting to approach levels that could threaten the health care systems there, indicating this is a growing problem.

While the medical risks are rising, the economic news has shown signs of improvement. The job market continues to show slower improvement, but the effects on consumer confidence and spending are becoming less apparent. Consumer confidence has bounced off of post-pandemic lows, and consumer spending has returned to a positive trend, after signs of a reversal. While this metric remains something to watch, it does suggest the effect of the expiration of expanded federal unemployment benefits may not slow the recovery as much as feared. It also suggests the economy is more resilient to the slowing job market than had been feared.

Financial markets rallied for the first two weeks of the month on the better economic news and hopes that the medical risks were under control. In the past week, however, those hopes have pulled back on fears that risks were more significant than had been assumed. Given everything that is going on, those fears seem reasonable, which suggests we might see more volatility ahead. That said, the fact that the economic risks remain under control, despite the rising medical concerns, should continue to provide some support.

Given all of this, over the next couple of weeks the most likely case appears to be further deterioration of the medical news, as well as continued slow improvement on the economic front. There are certainly risks coming into focus, and we need to be aware of them. But for the moment, those risks remain under control.