Will jobs report give a timely lift to Obama's record on the economy?

In a surprise development, the unemployment rate, at 7.8 percent, now stands the same level as when President Obama took office in January 2009.

On Friday, the Department of Labor reported the widely watched rate fell from 8.1 percent to 7.8 percent in September.

At the same time, businesses last month added only 114,000 new positions, giving Republican challenger Mitt Romney ample opportunity to criticize the president’s handling of the economy.

After this month, there is only one more jobs report before the election, so this report takes on distinct political importance. For Mr. Obama, the drop in the unemployment rate might be considered his best news for some time, especially considering that his Wednesday debate performance was considered to be flat, at best, by many commentators. In response, Mr. Romney charged that Friday's jobs report still doesn't signal that a real recovery is under way.

“These are the numbers the politicians are going to have to live with,” says economist Joel Naroff of Naroff Economic Advisors in Holland, Pa. “Romney can say 114,000 jobs is not enough, and Obama can say we are back to where the economy was when he took over and he has essentially turned it around.”

The White House said the latest numbers show that the economy is continuing to heal from the worst downturn since the Great Depression.

“It is critical that we continue the policies that are building an economy that works for the middle class as we dig our way out of the deep hole that was caused by the severe recession that began in December of 2007," said Alan Krueger, chairman of the Council of Economic Advisers, in a statement.

But Romney said the downward trend in job creation for the past three months is distressing. “This is not what a real recovery looks like,” he said in a statement. “If not for all the people who have simply dropped out of the labor force, the real unemployment rate would be closer to 11 percent.”

The divergence between the unemployment rate falling and new jobs created is the result of two different surveys. The new jobs part is called the establishment survey, which is derived from questioning businesses about their hiring. The unemployment rate is derived from what is called the household survey, which involves calls to about 50,000 people to ask their job status.

From the household survey, the Bureau of Labor Statistics found that 873,000 people said they had found work. After estimating the number of people who got fired or laid off, the BLS, using that survey, found that the number of unemployed people had dropped by 456,000.

The household survey sometimes picks up small-business hiring that is not captured in the establishment survey. But Mr. Naroff cautions that this particular statistic is volatile. “This is not a normal jump. It might overestimate what might have been done in any given month,” he says. “It is the pattern that is more important.”

The pattern over the past three months shows job creation is eroding. In July, the economy created 181,000 jobs and in August it created 142,000. Then, in September it dropped to 114,000 jobs.

Naroff says the reason for the dropoff is that businesses are beginning to pull back in advance of the uncertainty over the budget standoff in Washington. “We know people are still buying motor vehicles and going to department stores,” he says. “But business does not want to hire until Washington gets fixed.”

From an anecdotal standpoint, that explanation meshes with the experience of Andrew Ahrens of Ahrens Investment Partners in Lafayette, La. Mr. Ahrens says his boutique investment advisory firm could hire additional people. But with the "fiscal cliff" (the terminology for the budget standoff) looming, he says he is sitting on the sidelines. “I don’t like to jump out of the window if I don’t know what’s below,” he says.

Another indication that businesses may be holding back on hiring is the large numbers of people who were hired part-time last month. According to the BLS, the number of part-time workers rose by 600,000 in September.

“If you hire someone full time, you have to provide them with benefits,” notes John Canally, chief economist at LPL Financial, a Boston-based investment advisory firm. “But it’s also a relatively good sign because part-time jobs can lead to full-time jobs.”

Another reason for the part-time jobs could be because of the cutoff in extended unemployment benefits, he says. By the end of the year, no state will be able to offer laid-off workers 99 weeks of unemployment.

“People are realizing they are going to lose their benefits, and they are willing to take any job they can get their hands on,” says Mr. Canally. “It could be pushing them to take jobs they would not ordinarily take.”

Mr. Ahrens says he has heard stories about people who have been offered jobs but asked if the position would still be available six months later. “They say, ‘I’m just not ready for it yet,’ ” he says. “I think they are alluding to the fact they still have six months of benefits left.”

Many of those part-time jobs may have gone to young people, says Christine Owens of the National Employment Law Project (NELP), which advocates in Washington on behalf of the jobless. The BLS statistics indicate 70 percent of the jobs created last month went to people between the ages of 20 and 34.

“I am wondering if a lot of younger people moved into part-time jobs,” says Ms. Owens, who thinks the jobs report is generally positive for the economy. "It's good we got the unemployment rate back to where it was four years ago."  

However, 40 percent of the unemployed have been out of work for over six months, she adds.

According to the BLS report, employment increased the most in health care, transportation, and warehousing.

Economist Canally wonders if some of the part-time jobs reflect the continuing cuts in local school districts. “A lot of teachers are losing their jobs and picking up part-time employment as school bus drivers,” he says.

That trend might continue. This week a report by Challenger Gray & Christmas, the Chicago-based outplacement firm, found that retailers had announced they would hire 413,700 workers for the holidays.

“That number is off the charts,” says Canally. “We haven’t seen that level since the mid-2000s.”

Despite the improvement in the unemployment rate, Canally says, it is unlikely that the Federal Reserve will be impressed. Earlier this month the Fed announced it would begin a new stimulus program for the economy by buying long-term securities such as mortgages. To end the program, he says, "They need to see sustained improvement."

Naroff agrees the Fed is likely to keep its foot to the pedal for some time. “The Fed won’t think the jobs market is back to normal until unemployment gets down to [a range of] 6 percent to 6.5 percent,” he says. “We won’t even get below 7 percent until the first part of 2014.”