NEW YORK (Reuters) - Employers unexpectedly cut 20,000 in January, but the unemployment rate surprisingly fell to a five-month low of 9.7 percent, suggesting some labor market improvement starting to take root.

KEY POINTS: * The Labor Department said the economy shed 150,000 jobs in December, compared to 85,000 previously reported, but November was revised to a gain of 64,000, up from 4,000. Annual benchmark revisions to payrolls data showed the economy has purged 8.4 million jobs since the start of the recession in December 2007. * Analysts polled by Reuters had forecast payrolls gaining 5,000 and the unemployment rate to edge up to 10.1 percent. Median estimates from the top 20 forecasters expected payrolls to be unchanged last month. * A sharp increase in the number of people giving up looking for work helped to depress the jobless rate. The number of ‘discouraged job seekers’ rose to 1.1 million in January from 734,000 a year ago.

COMMENTS:

DOUG ROBERTS, CHIEF INVESTMENT STRATEGIST, CHANNEL CAPITAL

RESEARCH.COM, SHREWSBURY, NEW JERSEY:

“It indicates a certain form of stabilization but there’s not a bounce that everybody was looking for. Going into this with the ADP data, the Challenger data, and the initial claims data people were kind of negative.

“What is throwing people off is probably the 9.7 percent unemployment rate -- the drop in the unemployment rate --, which is positive but is not coming from new jobs created its coming from people dropping out of the work force.

“It’s a series of conflicting data ... The positive take is basically it wasn’t a total disaster, but the flip side of it is you’re not seeing a recovery.”

CARY LEAHEY, ECONOMIST, DECISION ECONOMICS, NEW YORK:

“The excitement is the unexpected drop in the unemployment rate. Both hiring and the number of people looking for work rose. That increases the sense that the unemployment rate peaked a couple of months ago. You won’t see much improvement in the unemployment rate for the rest of the year because more people will start looking for jobs, but it appears the unemployment rate is on, at worst, a flat path.

“Payrolls lost 20,000 jobs, pretty much as expected. Revisions to the prior two months offset each other. November job growth was much better but December was much worse.

“Manufacturing jobs finally grew, but that was masked by another big drop in construction jobs -- which probably was related to the weather.

“On the services side, a decrease of 48,000 jobs was led by retail trade which might be a problem of seasonal adjustments after Christmas.

“The market will probably conclude that the payrolls number should have been positive.

“Another large gain in temporary help was positive because that eventually will lead to more gains in permanent hiring.

“The workweek increased and average hourly earnings appear to be stabilizing with a gain of 0.2 percent.

“That said, when the market looks at what happens to weekly jobless claims, it still will argue that the February payrolls number will not be any better than January. You can’t say there is a lot of forward momentum, at least on the payrolls side of the ledger.

“The drop in the unemployment rate does have implications for the Fed. If the Fed sees the unemployment rate stabilizing, it’s obviously closer to lifting short-term interest rates than it would be otherwise. Everyone knows the Fed will be extraordinarily unwilling to hike rates until the unemployment rate starts to move lower.

“I would not characterize this report as in any way strong. On a scale of one to 10, it’s still a three or four.”

JOHN KILDUFF, PARTNER, ROUND EARTH CAPITAL IN NEW YORK

“The jobless data is neutral at best for energy prices. There continues to be job losses, and that will continue to translate into anemic gasoline demand.”

TOM SOWANICK, CHIEF INVESTMENT OFFICER, THE OMNIVEST GROUP,

PRINCETON, NEW JERSEY:

“The drop in the unemployment rate should be viewed in the context not that it is not a shocker but that this is the second monthly decline. The trend may now be established and that’s probably why the bond market was not reacting at first and now under pressure. Was January stronger than anticipated? The answer is yes because December was much weaker. Looking at the revision 85,000 to 150,000 last month and today it is 20,000...is that bigger than expected improvement? Absolutely. Average hourly earnings were both up month over month. In the detail, things are probably better.”

KURT KARL, HEAD OF ECONOMIC RESEARCH, SWISS RE, NEW YORK:

“It is an interesting set of numbers. Disappointment with the downturn in non-farm payrolls, but interesting that the unemployment rate ticked down quite substantially. It could mean some good news is coming soon. That is why the unemployment rate went down -- you had a very small increase in the labor force and a huge jump in household employment.”

JAY MUELLER, PORTFOLIO MANAGER, WELLS CAPITAL MANAGEMENT,

MENOMONEE FALLS, WISCONSIN:

“Last week’s gross domestic product number was largely a reflection of inventory, but actual demand is clearly not strong enough to get businesses to start hiring.

“We’re probably still at least six to 12 months away before we start to see a strong hiring trend. At the same time today’s numbers weren’t far enough away from expectations to be a major (Treasury) market mover.”

AMELIA BOURDEAU, SENIOR CURRENCY STRATEGIST, UBS, STAMFORD,

CONNECTICUT:

“Overall, we showed a relative improvement in payrolls today. Although we didn’t return to positive payrolls growth, we are still within expectations. The dollar had been bid before payrolls and now it has been weakening a little bit because I believe the benchmark revisions were a little more than expected. That might be a temporary reaction to revisions. Going forward, I think sovereign risk will continue to dominate and weigh on the euro versus the dollar since this payrolls number was within expectations.”