The Good and Bad News About January's Job Numbers

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PAUL SANCYA/AP

DaimlerChrysler is cutting 26,000 jobs, but elsewhere things are looking better

The sky is falling, right?

The Labor Department reported Friday that unemployment is up, way up, to 4.2 percent in January — higher than the analyst-expected 4.1 percent and higher, in fact, than it's been in 16 months. TIME senior economics reporter Bernard Baumohl takes you through the January monthly report.

Bad news, right?

Well, it's actually a mixed bag, with good news and bad news. And the good news may actually have the edge.

Give us the bad news first.

Manufacturing, which accounts for 20 percent of the economy, is obviously in a comatose state. You saw this from Thursday's NAPM (National Association of Purchasing Management) report, which actually showed that the sector is in a recession, and in the unemployment report it's apparent that most of the layoffs are coming from this area. Telecom manufacturers like Lucent, carmakers like DaimlerChrysler — these are the layoffs that are making all the headlines, and this sector is what's pushing up the unemployment numbers.

And the good news?

Payroll growth, the number of jobs added to the economy, is surprisingly strong. And the average workweek went up from 34.1 hours in December to 34.3 hours in January, which is also encouraging. That means employees are working more overtime, and that means they have more money to spend.

How can unemployment and payrolls both be rising?

Unemployment is a census figure — it counts people. A person counts as "employed" if they have at least one job. But many people have two or three jobs. Payroll growth is a measure of how many total jobs there are, so it's a good indication of what companies are thinking and doing. If they're adding jobs, it bodes well for the economy. That's actually the number that the financial markets look to as an indicator, more so than unemployment.

So where are all these jobs?

You've got to look at these numbers sector-by-sector.

The service sector — from restaurant workers to mall cashiers — is still doing fine. And if they're hiring, then people are still getting out and spending money. Consumer spending accounts for two thirds of the U.S. economy, and it's a big factor in the intensity of any slowdown. So although consumers' expectations of the next six months are pretty bleak, as we saw in this week's consumer confidence index report of January, that pessimism isn't showing up with nearly as much force in their day-to-day activity. (Exhibit B: Surprisingly strong January car sales.)

Construction hiring is also on the rise, accounting for a large portion of the new hiring in the report. That indicates that Americans are still buying homes at a good clip, and after a lot of bad weather in November and December, construction is back on the upswing.

What does it all mean?

Well, it's hard to draw too many conclusions from one mixed-signal employment report, but there are signs here that the economy is not headed for a recession after all. Manufacturing has been lagging behind the rest of the economy for years, and what we're seeing in the other sectors is that companies are still hiring and people are still spending. Even consumer confidence, which was dragged down by the six-month outlook, is currently still quite strong, and outlooks can change in a hurry.

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Fortune Investor Data
Historically, if the Fed really tries to avert an extended recession, it almost always succeeds. And Greenspan has not only cut rates more in January than he's ever done in any one month, he's hinted that more cuts are on the way. The fact that he's obviously on top of the situation may be giving businesses and consumers alike a sense of long-term optimism that can be self-fulfilling.