Unemployment Falls to 8.5 Percent

Are we finally seeing a jobs recovery?

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Unemployment continued its downward trend, falling to 8.5 percent in December from a revised 8.7 percent in November,according to the Labor Department, emboldening the notion that the long-awaited jobs recovery might finally be materializing.

The economy added about 200,000 jobs in December, the government reported. While that might seem like a pittance compared to the enormous number of Americans still unemployed—about 13.1 million—it's a blockbuster number compared to the data from previous months.

"The jobs picture is improving finally," says Brad Sorensen, director of market and sector analysis at Charles Schwab. "It's still probably slower than we'd like to see it, but it is improving."

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Beyond the jobs report itself, a slew of other encouraging economic reports are also giving credence to the notion that we might finally be seeing a sliver of that long-awaited jobs recovery.

For one, fewer Americans have been applying for first-time unemployment benefits. The number is closer to 372,000 now, but mid-December saw the fewest Americans since April 2008—about 364,000—apply for unemployment. While still sky-high, the number of people already receiving jobless benefits shrunk by more than 20,000 to 3.6 million, too.

Manufacturing, the primary driver of economic growth in the first half of 2011, has also seen a bit of a bump lately. While that helps, what the economy really needs is broad-based growth in the service sector, says Michael Gapen, senior U.S. economist at Barclays Capital.

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"The number is important but the composition [of that number] is also important," he says. "Job growth in the U.S. has to come from services," which include industries such as health care, education, and retail.

It's easy to get caught in the monthly numbers and get tunnel vision when it comes to the jobs outlook, but experts say longer-term trends are key to understanding the labor market and whether it's recovering. "You really want to look at the trend more than any one number," Sorensen says. "There can be a lot of variation in any one month and as we've seen over the past couple of months, [there can be] revisions to those numbers."

And finally, it's been said before, but this economic "slocovery" as some have called it isn't what Americans are used to. Job growth during prior recoveries has benefited from a robust housing and construction sector, and we all know that just isn't happening this time around. According to Gapen, anything around 150,000 to 175,000 jobs created is a very good number these days and "should be viewed as a jobs recovery."

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"It's going to be different," Gapen says. "If your view is when we grow fast it means 200,000 to 250,000 a month, no. We're not there because we don't have housing and construction fully onboard."

"We have to temper and readjust our expectations," he adds.

mhandley@usnews.com

Twitter: @mmhandley