The Labor Department said the jobless rate declined to 5.6 percent from its six-year high of 5.8 percent reached in December. U.S. economists had projected the rate would rise to 5.9 or 6 percent, but Employment gains in construction, air transportation and retailing helped offset job losses in other industries.
Meanwhile, the number of workers on payrolls outside the farm sector decreased by 89,000 in January, after a 130,000 drop in December.
Bill Cheney of John Hancock told CBS News Friday's figures were good news.
"It's way less job losses than we had for the last four months," he said, and I think it's a sign the economy is starting to turn around."
However, CBS News Correspondent Anthony Mason reports the U.S. Chamber Of Commerce says the layoffs are likely to continue for awhile.
"I think you're still going to see some industries that lagged, that are late coming into the recession," said the Chamber's Tom Donahue. "And so you'll have some layoffs. You'll have companies with difficulties. On the other hand we have started hiring again."
Although the lower unemployment rate was good news, the payroll drop was steeper than the 27,000 fall projected by U.S. economists in a Reuters survey.
In an additional sign that the job market remains weak, the average workweek shrank for employees both at private companies overall and in the factory sector.
"It is certainly a mixed bag. I would regard the payroll number as a bit of a disappointment, but I don't think it changethe broader picture that the worst for the economy is over and that we are slowly turning the corner," said Doug Porter, economist at BMO Nesbitt Burns.
In a related development, an important gauge of manufacturing activity ticked higher in January, suggesting that the battered sector is poised to emerge from its 17-month slump.
The Institute for Supply Management said its index of business activity rose to 49.9 in January from a revised 48.1 percent in December. Analysts had been expecting a reading of 50. An index above 50 signifies growth in manufacturing, while a figure below 50 shows contraction.
Analysts say the nearly year-long recession, which started in March, could be ending. The government reported this week that the U.S. economy managed to eke out a 0.2 percent increase in growth in the final three months of the year, bolstering hopes of recovery.
But Labor Department officials cautioned against reading too much into January's positive employment news. January tends to reflect large seasonal movements after the holidays, and that can skew the outlook on the job market.
Analysts say this is a fragile period for the economy.
"We know we're going to get out," said Donahue. "The question is are we going to stay out? Or are we going to get a second dip. We want to stay out."
The employment report showed that retailing posted a seasonally adjusted gain of 62,000 jobs in January following job losses of 241,000 in the last five months of 2001. Holiday hiring in department and apparel stores and other shops had been very light, so there were fewer layoffs than usual in January, resulting in employment gains.
The nation's housing market has continued to flourish despite the economic downturn. But poor weather in January caused construction firms to cut 54,000 jobs. But employment in finance, insurance and real estate edged up by 9,000 as low interest rates continued to entice home buyers.
Air transportation actually grew by 8,000 jobs as the very light holiday hiring in air freight resulted in fewer layoffs than usual. Employment related to commercial airlines continued to fall, however.
The manufacturing industry also kept shedding jobs in January, though the loss of 89,000 was the slowest decline since September. The largest declines were in transportation equipment as motor vehicle plants had temporary shutdowns and aircraft factories also continued to cut jobs.
Fourth-quarter growth in the nation's economy and other signs of recovery persuaded the Federal Reserve to halt its yearlong campaign to lower interest rates. The Fed cut short-term rates 11 times last year in an effort to encourage consumer and business borrowing to jump-start the weak economy.
But the job market will be slowest to recover, and analysts think the unemployment rate, which hit a six-year high in December before last month's drop, probably will continue to rise into the summer to as high as 6.5 percent. That's because the level of ob growth in the early stages of the recovery will not be enough to accommodate new workers as they enter the job market.
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