No one can be criticized for being befuddled by the employment report. Yes, how can the unemployment rate fall so much at the same time that the economy adds so few jobs? Apparently, the markets are pretty confident that the “rebound” is intact. Stocks went up and so did long term rates, both signals of improving economic activity.
For sure there was probably more noise than usual in this month’s report. Noise fell from the sky in the shape of snowstorms, and then there is the noise from seasonal hiring and adjustments by the BLS in estimates of population size, which distorts comparisons between the months of January and December.
Scott Sumner has a take:
If I’m right, then any change in the unemployment rate of more than 0.6% over a relatively short period of time, probably indicates that the actual unemployment rate changed—that it wasn’t all statistical noise.
Between November 2010 and January2011 the unemployment rate fell from 9.8% to 9.0%. Let me emphasize that I strongly believe some of this was noise in the data, perhaps as much as 0.6% of the fall. Thus the actual rate may have fallen from say 9.5% to 9.3%. But I don’t think it was all noise, otherwise we would have seen previous episodes where the unemployment rate ticked up by more than 0.6% without triggering a recession. And over the past 63 years (more than 750 months) we just don’t see meaningless blips that large.
The figure below shows this is so, even if I only take into account the last three recessions. From the low of the unemployment rate in March 1989, unemployment went up by 0.5% points at the peak of the cycle (start of the recession) in July 1990. It went up again by 0.5% from April 2000 to March 2001. From the low in May 2007 it went up by 0.6% by December 2007 and then went up like a rocket a few months afterwards. 
The following figures show what is (almost) “unique” to the present situation. It is understandably surprising that the unemployment rate fell by 0.8% points between November 2010 and January 2011 because the number of employed people went up little and very little while the number of unemployed people went down so much and then even more! (Note: the data are from the Household Survey)
When we take a peek at what´s happening with the Labor Force and the Participation Rate we see something that helps “solve the mystery”. The Labor Force has been on a downtrend since the economy “fell off the cliff” in mid 08. The Participation Rate is the lowest since the early 1980s, after having peaked at 67.3% in 2000, and falling fast since the economy tanked. The discouraged are getting even more discouraged, dropping out of the Labor Force. 
As usual, we´ll certainly know more in the next few months after further adjustments are made and month-to-month comparisons make more “sense”. But the fact is that the labor market situation is not good. The figure below shows that the number of people with jobs is a bit below the number of job holders at the beginning of the last decade, even though the working age population has gone up by 27 million! 
It seems the US economy is not anymore the “job creating machine” it became famous for in the 1990s
Historinhas 