In so many ways it couldn't look worse for America's newspapers, facing as they do declining circulation, shrinking advertising and tumbling profits as the internet takes a deeper bite of all three.

Last week some 400 newsroom people lost their jobs at papers across America.

But there is some good to report.

Papers are doing a better job at doing what they do best: reporting the news. They are doing a better job connecting with their readers by delivering the news readers want rather than the news editors think they should get, as in the past.

That's one of the findings of a new report out from Pew Research Center’s Project for Excellence in Journalism, titled "The Changing Newsroom.”

The evidence of papers doing a better job is that their readership is actually on the rise, and it's been gaining over the very years that papers have been cutting staff and refocusing their coverage on local news.

Newspaper readership is up for the second straight year, rising 2.5 percent this spring over last, to 80.5 million readers, according to a National Newspaper Network study out yesterday.

The new local news focus, of course, isn't new at all. It was what newspapers did years ago. They got away from it in recent years as their focus shifted away from community and small local advertisers toward national and international coverage and more and more mall- and chain-based advertising.

Advertising and coverage might not seem related. They are. Local advertisers are much more concerned about having their ads next to local stories they know their customers will be reading. Big advertisers tend to care little if at all about news coverage and everything about size and breadth of circulation. They want the numbers.

But one of the values of local coverage, as newspaper critics have long pointed out, is that it's one area where newspapers face little competition if they do it well, whereas national and international coverage is highly competitive, offering papers little chance to stand out in the eyes of their readers.

By moving away from local coverage, papers paid the ultimate price: a flight of readers.

Local news is again the mantra of newspaper editors, as the Pew study documents. The study surveyed senior news executives at 259 newspapers, including more than half of those papers across the country with 100,000-plus daily circulation and a third of those with circulation between 50,000 and 100,000.

“A whopping 97 percent of editors rated local news ‘very essential’ to their news product—by far the highest percentage of any news category,” says the PEJ study. “Even America’s largest newspapers—those with the greatest reach—gave their highest ‘very essential’ rating (94 percent) to local news.”

Further, community news was the top gainer among the topics gaining or losing space in papers across the country. Sixty-two percent of respondents reported that community news had gained space over the past three years, compared to just 8 percent who said it had lost space.

State and local news had the second-biggest jump, with half reporting an increase and 13 percent a decrease, followed by editorial, with 17 percent saying it was up and 14 percent reporting it was down.

Foreign news suffered the biggest falloff, with 64 percent reporting it has lost space in the past three years, compared to 3 percent reporting it had risen.

Fifty-six percent of respondents said that stories are shorter now than three years ago, and 61 percent said the space for news has shrunk. Still, 46 percent said the number of stories had increased.

The downside of all this, though, is that for all the improvements in news coverage, editors feel their newspapers still face a bleak future. They don't think the economic model works any longer.

Fifty-nine percent of respondents said their papers had undergone layoffs the past three years, including 85 percent of papers with circulation over 100,000. Newsrooms have become younger in the process, as older, higher-paid reporters have been replaced by less-experienced, lower-cost reporting staffs.

Editors see their best hope in figuring out how to better monetize their web sites. Sixty-nine percent said their papers are very actively searching for new streams of revenue, and most are doing so online.

“Convincing newspaper advertising sales staff to become more active in selling to the web is also viewed as an essential, overdue step, even if it’s not easy,” concludes the report.

“Roughly 90 percent of advertising sales remain with the print media. In interviews, newsroom executives complained that advertising departments traditionally have been far more resistant than their editorial counterparts to the changes brought by the Internet Age.”