The July U.S. jobs report was a blockbuster, but there’s still progress to be made in the labor market and the recent spike in COVID-19 cases means it’s too early to celebrate.

Why it matters: The U.S. economy continues to show great momentum, which puts more pressure on the Federal Reserve to scale back its emergency monetary policies. However, doing so too early risks having the economy backslide.

By the numbers: Employers added 943,000 jobs in July, which was considerably better than the 850,000 economists were expecting.

• June and May numbers were revised up by a total of 119,000 jobs.
• Notably, the unemployment rate dropped to a pandemic-era low of 5.4% from 5.9% in June.

Yes, but: While the labor force participation rate climbed to 61.7% in July from 61.6% in June, it’s still well below the pre-pandemic level of 63.3%.

What they’re saying: "The pandemic effects are still at play," Anu Gaggar, global investment strategist for Commonwealth Financial Network, tells Axios.

• According to the Census Household Pulse Survey, 2.8 million Americans said they were not working because they were “concerned about getting or spreading the virus.” These folks would boost the participation rate by a percentage point if they reentered the workforce.

Threat level: Economist Justin Wolfers noted that the July jobs report was based on a survey that reflects decisions made before the recent surge in COVID-19 cases.

• Oxford Economics chief U.S. financial economist Kathy Bostjancic said, "The highly contagious delta variant casts a shadow on the labor market recovery in the coming months, threatening to slow the return of workers still on the sideline due to childcare issues or health concerns."

The bottom line: The July jobs report clearly shows that the U.S. economy was on a great trajectory. But it remains to be seen exactly how the new wave of infections is affecting activity.

• Given that, it will be important to monitor future jobs report closely for any signs of a slowdown in the labor market recovery, Bank of America U.S. economist Joseph Song writes in a research note.
• "This will be critical for the Federal Reserve — [the jobs] report leaves September in play for a taper announcement but contingent on another very strong jobs report next month," Song says.