The problem with contracting right now is that there are a lot of laid off people, and many of them are trying to go into contracting. So there is a lot of competition. However on the flip side a lot of companies who did layoffs have found, or will find, that they now have too few people for some key project X. They do not wish to hire full time employees at the moment, but the project is still necessary. As a result contract work is opening up.

The question is who gets that work. First dibs tend to go to people who the companies in question know to be good. Which means that if you're fresh out of work and are looking for a break, you're going to have a lot of trouble. However anecdotal reports from some people I know says that people who have established a reputation for themselves are now busier than ever.

Speaking personally I'm on both sides of this dynamic. I was not laid off, however my employer made me go part time for a few months. (I have been offered my full time job back starting in May.) I therefore have been looking for contracting. I'll be honest and say that coming up with contracts takes a lot of effort. But with what I've found already, I'm better off now than I was when I worked full time. Of course who knows how long that will last?

For obvious reasons I would not recommend that anyone voluntarily quit their jobs in this market without a very good reason. However if you're without a job, don't automatically rule contracting out as a possibility. If you're interested in doing this, though, do everything in your power to make it happen. Post your resume on job boards. Register for sites like Sologig. Let your friends know that you're looking. And above all, take advantage of everything that Linked In has to offer. Update your profile and your friends will know you are looking. They have a job board and lots of people don't think to look there. Plus if you have a lead on anything, anywhere, go look up any names you hear about on Linked In. What you're looking for is to find out whether you're lucky enough to share any connections. If so, then try to get your connection to make a personal referral for you. When a hiring manager is looking at a stack of resumes, there is no simpler way to force him or her to look at one in the middle than to get a referral from a friend.

Update: I added some advice for people who are on the market.