The U.S. economy offered its latest signal of recovery as employment grew for the first time in seven months and the jobless rate fell for a second straight month, exceeding investors' hopes in both cases.

The Labor Department reported Friday the jobless rate declined to 5.5 percent in February from 5.6 percent in the previous month. Most experts had been expecting an increase to 5.8 percent.

The jobless rate dropped is at its lowest level since October. 

Retail Employment Rises

That drop came as a rise in retail employment, boosted by seasonal forces, helped add 66,000 jobs to payrolls outside the farm sector -- the first addition to payrolls since a mild 18,000 gain during July of last year. February's gains followed job losses of 126,000 in January, worse than the previously reported 89,000 job losses.

The American economy has shed more than 1.4 million jobs since the recession began a year ago. Highlighting how badly the economy was hammered by the Sept. 11 attacks, 1.2 million of those job losses came between September and January.

The dip in the unemployment rate came as 851,000 people returned to the job market last month after nearly 1 million gave up looking for employment in January.

"This definitely keeps alive the prospect of a stronger-than-expected bounce in the U.S. economy going into the second half of the year," said Andrew Delano, currency analyst for IdeaGlobal in New York.

"There is a little bit of fresh hiring out there. And I think that's a very good sign that the labor market has stabilized and is poised to bounce a little," he added.

Rate Increases Seen

The report adds to expectations that the Federal Reserve will shift its stance on the balance of risks in the U.S. economy at its March 19 meeting to signal that it may start to increase interest rates as early as the middle of the year.

But with the recovery in its early stages, the central bank will be wary of choking off the recovery too early, especially until the job market has returned to full strength.

But the report showed some constraints still in the labor market with employers keeping costs low. The length of the average work week was unchanged at 34.1 hours and average hourly earnings rose a slim 0.1 percent to $14.63.

The latest evidence the economy may have shrugged off its relatively mild slump came just one day after Fed Chairman Alan Greenspan proclaimed the recession over and the recovery underway in a Congressional hearing. But the powerful central banker warned the latest recovery could be milder than past rebounds.

Underlying Fragility

Highlighting the fragility of the current job market, February's payroll gains were driven by a 58,000 addition in retail jobs. But the Labor Department said those gains were uncertain, given unusual seasonal factors.

The government department said that because retail hiring was so weak over the holiday period the normal raft of retail layoffs in January and February failed to materialize.

The service-producing sector added 97,000 jobs in February and the construction business added 25,000 positions as unusually mild weather allowed more work than normal at this time of year.

Manufacturing continued to shed jobs, losing 50,000 last month. But that was about half the average pace of the previous 12 months. Employment in motor vehicle manufacturing jumped by 26,000 last month, prompted by the reopening of automobile plants that had shut down for inventory control in January. Still, employment in auto manufacturing is down 63,000 over the year. 

But most economists still expect the jobs market to remain choppy in the months ahead.

"We're not in neutral anymore. We're in first gear," said Ken Mayland, president of ClearView Economics in Cleveland.

"But I'm not sure that the unemployment rate has peaked and (is) trending down."

The Associated Press and Reuters contributed to this report.