While economic activity has rebounded a lot from its March/April lows, we're still well-removed from a full recovery, and the pace of improvement appears to have slowed a lot over the last couple of weeks.
And with the S&P 500 having recovered the lion's share of its February/March losses and the Nasdaq having roared above 10,000, it's worth keeping an eye on how business and consumer activity trends if worries mount that an economic recovery will be far from V-shaped.
In many ways, Thursday's jobs report is reflective of the glass-half-full/glass-half-empty nature of a lot of the economic data that's arriving right now. On one hand, non-farm payrolls rose by 4.8 million in June (well above a consensus of 2.9 million) thanks to a 4.8 million-person drop in the number of people on temporary layoffs, and the unemployment rate fell by 2.2 points to 11.1%.
On the other hand, an 11.1% unemployment rate is still more than 3 times higher than February's 3.5% rate. And permanent job losers -- defined as people who don't expect to return to the jobs they lost -- rose by 588,000 to 2.9 million, a much larger increase than May's 295,000.
Meanwhile, at a time when COVID-19 cases have risen sharply in many Southern and Western states and prompted some of the states to impose new restrictions, there are signs that certain types of consumer spending have either stopped improving or begun regressing since mid-June.
As of June 28, JPMorgan's (JPM) daily consumer spending tracker, which relies on Chase payment card data, showed a 13.1% annual decline. That's far better than the 41.5% annual drop seen at its March 31 low, but worse than the 9.6% decline seen a week earlier. Spending weakened from the 21st to the 28th across all three tracked age groups, and both in states that have and haven't seen a major recent uptick in COVID cases.
Not surprisingly, flight bookings and restaurant reservations also seem to have come under renewed pressure, judging by data from Booking's (BKNG) Kayak and OpenTable units. After briefly seeing annual U.S. restaurant reservation declines fall below 60% during the third week of June, OpenTable reported a 64.7% drop for July 1. And Kayak, which saw annual declines in U.S. domestic flight search activity fall below 50% for a while in June, reported a 63% drop for July 1.
For now, equity markets are taking both COVID case growth and signs of stalled consumer spending growth in stride. The reasoning seems to be that as long as Congress and the Fed keep aggressively supporting the economy and financial markets, there's no need to get too concerned about such headwinds.
But such a mindset could be too dismissive of risks that future stimulus efforts won't be quite as effective as past ones -- for example, if the next stimulus bill doesn't renew the extra unemployment insurance benefits that are set to expire at the end of July, or if the Fed eases up on its unprecedented support of corporate debt markets.
And perhaps more importantly, such a mindset might be too dismissive of how businesses that (in spite of seeing revenue come under pressure) haven't yet made drastic spending cuts in response to COVID-19 might change their minds if they see the economy remaining weak for the rest of 2020 and beyond.
Such spending cuts could affect not only companies in the hardest-hit industries, such as travel and hospitality, but also firms in industries where moderate revenue/profit declines could be happening (automotive, media, financial services, etc.), or firms that get a meaningful portion of their revenue from companies in the hardest-hit industries. Payroll, capex and ad spend often all get affected when companies feel that they need to hunker down due to a prolonged economic downturn, and the job cuts inevitably have an impact on consumer spending.
Looking at the tech sector in particular, such a spending environment would immediately take a toll on enterprise IT and online ad spending. And -- though a fresh round of stimulus checks might provide an additional near-term boost to consumer tech and electronics spending -- its ripple effects would eventually hurt demand for many of the consumer hardware markets that tech companies rely on, from cars to TVs to smartphones.
In a market environment such as the current one, where a lot of retail and institutional investors remain eager to bid up tech stocks that are still delivering healthy top-line growth, a reversal might not happen until (as was the case for a lot of tech companies in 2000) signs start emerging that growth is meaningfully slowing. But investors should stay mindful that the margin of error has gotten a lot smaller now, and that potential headwinds exist that might not be so easily neutralized by another round of stimulus and Fed actions.