Last week's market rollercoaster ended on a high note following a report that the national unemployment rate dropped for the first time in 15 months. The good news heartened market watchers, but for many of our pundits, it's not enough evidence that a sustainable recovery is taking place.

Nevertheless, the markets rallied Friday after the Labor Department said July's 247,000 initial jobless claims was the smallest job loss on record since Lehman Brothers went bankrupt in September 2008. The Dow gained 198 points for the week to close at 9172, and the S&P 500 picked up 23 points ending at 1010.

Societe General chief economist Stephen Gallagher also cheered the news and said he was encouraged by the 0.2% uptick in wages and signs that income appears to be stabilizing. "If so, fears on the consumer sustaining the recovery in 2010 should diminish," he wrote on Friday. "The July job loss, while still heavy, is a notable improvement."

We're not out of the woods yet, though. Not all of last week s data was rosy. Personal income dropped 1.3% in June, the biggest monthly decline in four years. And the Institute for Supply Manufacturing said its July reading of its services index shows the services sector continues to contract.

Gluskin Sheff chief economist David Rosenberg believes there's less than meets the eye when it comes to real economic pickup especially when it comes to consumers' ability to spend money. The success and subsequent extension of the "Cash for Clunkers" government incentive program may have spurred vehicle sales, he says, but it's distorting the reality that most Americans simply don't have the money to spend on such purchases and that spending government money doesn t make for a real recovery.

"If there is pent-up demand for autos why do we need a rebate?," he wrote on Thursday. "If there are 20% more vehicles than there are licensed drivers, why the need to perpetuate this cycle of overspending?"

Ed Yardeni of Yardeni Research says cutbacks on spending by businesses are creating a schism where the markets thrive and consumers struggle. While cutting costs allow businesses to post higher profits, a large number of workers are finding themselves without a paycheck, he says.

"In the past, businesses would hold on to their workers during recessions figuring they would need them when business improved," he wrote on Thursday. This time, he says, businesses seem to be betting that when their sales recover, they ll be able to increase output without hiring workers. If my analysis is correct, then the employment recovery will be lackluster. However, the profits recovery could be spectacular, or at least surprisingly strong, and drive stock prices higher, he wrote on Thursday.

The market rally has proven to be a boon for stock pickers and fund managers who are faring better than originally anticipated, according to two reports published last week by Bank of America/Merrill Lynch analysts Savita Subramanian and Steven DeSanctis. Among large-cap funds, Subramanian wrote that 54% of active large-cap managers have outperformed their benchmarks year to date up from 48% a year ago. Small-cap stocks show a 17% yearly sales decline, the worst showing since Merrill started keeping data, but DeSanctis also said "over 50% of the [small-cap] companies have shown a positive [earnings] surprise and we continue to see an improvement to the average estimate change and revision ratio."

Barry Knapp, the strategist at Barclays Capital, applauded the market rally but said economic recovery still faced the harsh realities of high unemployment and tight household budgets, factors that could weigh on holiday spending and quash expectations of further growth, he wrote on Aug. 3.

"[W]e believe that the probabilities favor at least one more growth scare in 2009," he warned. "We recommend staying long the recovery for now."