The U.S. economy continued its recovery in October, with most sectors participating. Friday’s employment report showed 638,000 jobs were added, bringing the unemployment rate to 6.9%. Overall, the labor market has regained 12 million jobs of the 22.1 million lost during the economic shutdown. Government stimulus checks, enhanced unemployment benefits, and low interest rates have boosted spending, especially on automobiles, home improvement, and other big-ticket items. Consumers still appear to be cautious about the path forward as evidenced by a 14% savings rate.


The economic recovery has been driven so far by businesses meeting demand lost during the pandemic. Going forward, we are likely to see a return to more normal rates of growth on the path to full recovery. The strong third-quarter GDP report (33.1% annualized, or 7.4% quarter-over-quarter) left the US 13.25% below the peak output level reach at the end of 2019. The Federal Reserve GDP Now model predicts the fourth quarter to slow to 3.5% annualized. Assuming a 2.5% GDP growth for 2021 will bring the US close to par and set the stage for a return to growth in 2022.


While overall we are optimistic, worrying signs are developing in the labor market. Many of the job losses, once classified as temporary, are now considered permanent. Service industry businesses, the largest U.S. employer, have struggled with weak demand as consumers remain wary of the virus. Bankruptcy filings have been surprisingly low so far, but government support is sunsetting, which could push more businesses to close permanently. The path of the virus and additional economic stimulus, if any, will largely drive the shape of labor market recovery, especially within the service sector.


Bottom Line: Fiscal and monetary support has led to a remarkable economic recovery to date. The unemployment rate has been cut roughly in half in six short months. The path forward is somewhat murky and perhaps more of a “swoosh” shape than a steep “V”, but we remain cautiously optimistic the U.S. can fully recover by the end of next year.