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The labor market deteriorated in December, but not to the degree that forecasters had thought.

According to the Labor Department, the economy lost 124,000 jobs in December, compared with a loss of 371,000 in November. The consensus among economists was for a loss of 139,000 jobs, according to


. The unemployment rate rose to 5.8% from 5.6%, in line with expectations.

That the employment report came in well bodes well for the economy. Wednesday's Purchasing Managers' Index showed that manufacturers are beginning to see a pick up in demand -- a precursor to a return to economic growth. The one bogey to recovery, however, was that a weak labor market would prompt consumers to reduce spending, which would in turn extend the recession.

"The report reinforces this notion that investors, rightly or wrongly, are considering: That the economy may have bottomed out," says Morgan Stanley fixed-income economist Kevin Flanagan.

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Market reaction to the report was mixed. The


rose in early trading and was recently up about 50 points, but the


, which popped early, fell back and was close to unchanged about an hour after the opening bell. Meanwhile, Treasuries sold off on the fear that the economy may soon be growing too quickly for Fed's liking, leading to rising interest rates. The benchmark 10-year was off 15/32 to 98 24/32, pushing its yield up to 5.17%,


Still, says Raymond James chief economist Scott Brown, the economy is not entirely out of the woods. "Manufacturing may have started to rebound, but there's still some question about the consumer," he says. "We've gone from 3.9% unemployment to 5.8%. That's pretty startling."