Updated from 2:22 p.m. EST

A myriad of economic reports offered further confirmation Friday that the economy is clawing its way back. But the data also showed that risks remain and that a tepid turnaround may be the best investors can hope for.

On face value, the economic news was generally positive Friday, as it has been all week. The unemployment rate dropped for the first time since May, manufacturing hit its highest point in a year and a half, construction spending eked out a gain and consumer sentiment in January was more robust than it had been in months.

Still, there was another fact evident in Friday's numbers: the recession hasn't yet loosened its grip over the economy.

Nonfarm payrolls fell by 89,000 in January, the smallest one-month job loss in six months, and the unemployment rate slipped to 5.6%, below last month's 5.8% reading and analysts' estimate of 5.9%.

The drop in payrolls was much greater than expected though and several economists said the slide in the jobless rate was a statistical fluke. Paul Kasriel, chief U.S economist at Northern Trust, believes the drop was due to a decline in the labor pool, which fell to 12.7 million from 12.9 million.

"Sometimes people say 'well, there are no jobs out there so I'm not looking anymore' and so they're not counted as unemployed," he said.

Drew Matus, an economist at Lehman Brothers, also expressed concern, saying the data show that people are becoming discouraged in their quest for work, which may be a warning signal that consumers are starting to falter.

"(This is) the clearest sign yet that risks still remain to the economic recovery," he noted. "There are still a lot of cautious signs which is probably why the Fed left its bias in place."

A report on manufacturing was slightly more encouraging. The Institute of Supply Management Index, formerly NAPM, came in at 49.9% in January compared with expectations for a reading of 49.7% and last month's 48.1%.

Production rose to a five-month high of 52% from 50.3% and inventory liquidation slowed to its lowest level since March last year.

Still, readings on construction spending and consumer sentiment were more mixed. Construction spending rose 0.2% in December, matching analysts' expectations, although November spending was revised down to 0.3% from 0.8%.

"The underlying trend is clearly softening; even a strong housing market will not be enough to offset the corporate construction retrenchment, which we think will last through the first half of this year at least. A slow recovery here," noted Ian Shepherdson, economist at High Frequency Economics.

Meanwhile, consumer sentiment, as measured by the University of Michigan Consumer sentiment survey, rose to 93.0 versus 88.3 in December but was down from a reading of 94.2 at midmonth as stock prices declined.

The index was led lower by a decline in the current conditions index, which dipped well below December's reading. The view of the current economic conditions fell to 95.7 from a final December reading of 99.0. The expectations index was 91.3, slightly lower than the preliminary figure but still well above the 82.3 seen in December.

"It's going to be a slow recovery by comparison to the past," said Merrill Lynch economist Richard Berner. "Usually in the first year of a recovery you get something like 5% to 7% growth. We'll be lucky to see half that."

Northern Trust's Kasriel offered three compelling reasons for a muted recovery this year. First, he said, the recession appears to have been the mildest in the postwar period so "you wouldn't expect to see a huge surge." Second, many overseas economies remain in an economic quagmire (note how Japan's Nikkei index fell below the Dow for the first time ever this week). Finally he said consumer and corporate balance sheets continue to be highly leveraged, which could force some retrenchment in spending.

On the flip side, he noted that inventories have been liquidated at the fastest pace in the postwar period and that money supply has grown sharply. "The most compelling reason to believe we will have a strong recovery is because no one is expecting it. The consensus is almost always wrong," he added.

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