The number of Americans filing for first-time unemployment benefits fell by 56,000 to 395,000 in the week ended Jan. 5 from a revised 451,000 a week earlier, the Labor Department said.

But the better-than-forecast result is partly the result of workers in California who delayed filing to be eligible for a $100 increase in the amount of available compensation that takes effect next week. The number of jobless claims in California fell by 11,545 -- more than in any other state -- in the week ended Dec. 29.

"California probably distorted the data," said Mike Moran, chief economist at Daiwa Securities. "But it doesn't alone explain the improvement in initial jobless claims over the last month."

The number of continuing claims, which are less susceptible to weekly fluctuations, fell 166,000 to about 3.5 million. Separately, the four-week average of claims fell to 410,500 from 410,750.

"The drop in weekly claims may have been exaggerated," added Paul Kasriel, chief economist at Northern Trust. "But the decrease in continuing claims backs the notion the labor market is bottoming."

Kasriel says that a few leading indicators suggest that an economic recovery is underway. Year over year, the M2 measure of U.S. money supply is up 9%. Also, the spread between 10-year Treasuries and the fed funds rate has widened to 300 basis points. And the manufacturing workweek increased in December.

In 2001, two-thirds of the total job losses came from the manufacturing sector, which has been hit hardest in this recession. Last week's reading on the Institute for Supply Management's manufacturing index, however, suggesting an economic recovery in the sector could occur sooner than expected.

Still, layoff announcements continue, with cuts coming from

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this week.

With the bad news, some economists think there is room for additional Fed easing. "Today's number is still consistent with an upward drift in the unemployment rate," said Moran. "So it's conceivable that the Federal Reserve would lower rates again to provide some insurance."

The market is ambivalent about another easing. Fed funds futures, one proxy of monetary policy, are pricing in only 25% odds of a 25-basis-point reduction this month. But at the same time, 80% of Wall Street's primary dealers are forecasting another cut to short-term interest rates, which stand at 1.75%.

In remarks to reporters today, Philadelphia Federal Reserve president Anthony Santomero left open the door for more easing. "We have the ability to do the appropriate monetary policy action as we see fit when all of the data are in," Santomero was quoted as saying at a National Economics Club luncheon.

Treasuries rose on the news: The benchmark 10-year note ended up 17/32 to 100 5/32, dropping its yield to 4.98%, while the 2-year note closed higher by 3/32 to 100 19/32, lowering its yield to 2.93%.

Santomero also said he wouldn't put too much stock in today's jobless data, due to year-end fluctuations. And he reiterated his belief the economy will not turn until mid-2002.