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* Nonfarm payrolls rose 114,000 in September * Unemployment rate falls to 7.8 percent, lowest since 2009 * Household survey shows most job gains since 1983 * Average hourly earnings gain 7 cents * Report is second to last before Nov. 6 elections By Lucia Mutikani
WASHINGTON, Oct 5 (Reuters) - The U.S. unemployment rateunexpectedly dropped to 7.8 percent in September, reaching itslowest level since President Barack Obama took office andproviding a boost to his re-election bid.
The Labor Department said on Friday that employers added114,000 workers to their payrolls last month, a moderate number,but it said a combined 86,000 more jobs were created in theprior two months than it had previously thought.
Other aspects of the report also were strong. In particular,a separate survey of households found a big surge in hiring.That pushed the jobless rate down by 0.3 percentage point to itslowest level since January 2009.
"It's a good report. The picture is still not a great one,but it's not so bad given the unusual headwinds that we havebeen faced with," said Ray Stone, an economist at Stone &McCarthy Research Associates in Princeton, New Jersey.
Obama said the report showed the economy was making progresswhile his Republican challenger Mitt Romney said the labormarket was not healing fast enough.
Businesses have been hesitant to hire out of concern theU.S. recovery could take a hit from a sharp tightening of thefederal budget next year, any worsening of the debt crisis inEurope and a slowdown in the global economy.
So far this year, job gains have averaged 146,000 per month,compared with 153,000 per month in 2011.
Economists had expected the unemployment rate to rise to 8.2percent in September. The drop last month came even as Americansreturned to the labor force to resume the hunt for work. Theworkforce had shrunk in the prior two months.
The household survey, which can be very volatilemonth-to-month, showed employment increased 873,000 -- the firstrise since June. But two-thirds of those were Americans who tooka part time job even though they wanted full-time work, a factthat took a bit of the shine off the report.
Still, the report broadly signaled a healthier labor market.The employment-to-population ratio, or the proportion of theworking-age population with a job, increased to its highestlevel since May 2010.
Stocks on Wall Street rose, with the Dow Jones industrialaverage touching its highest point in almost five years. Thedollar climbed to a two-week high against the yen, while pricesfor U.S. Treasury debt fell.
U.S. interest rate futures also slipped as traders bet animproving jobs market could lead the Federal Reserve to back offits monetary stimulus earlier than had been expected.
Instant view - US jobless rate tumbles:
Graphic - U.S. payrolls:Graphic - U.S. unemployed:Graphic - U.S. payrolls gap:
Reuters Insider on payrolls report:
There now remains only one more employment report before theNov. 6 election that pits Obama against Romney, and that comesjust four days before voters go to the polls.
"We are moving forward," Obama said as he plead his caseduring a campaign rally in a Washington suburb. "After losingabout 800,000 jobs a month when I took office, our businesseshave now added 5.2 million new jobs over the past 2-1/2 years."
"This country has come too far to turn back now."
Despite the progress, the economy is still about 4.5 millionjobs short of where it stood when the 2007-09 recession startedand Romney sought to remind voters that the labor market wasstill far from healthy.
"There were fewer new jobs created this month than lastmonth and the unemployment rate, you know, this year has comedown very, very slowly," Romney told a large crow of supportersin Abingdon, Virginia. "The reason it has come down this year isprimarily due to the fact that more and more people have juststopped looking for work."
A Reuters/Ipsos poll released on Thursday after Wednesday'sfirst presidential debate showed Romney had gained ground, butanalysts said Obama was due to get a lift from the jobs numbers.
"Good economic news is good political news. President Obamaneeded that after the debate and it gives him numerical evidencethat his policies are working," said Julian Zelizer of PrincetonUniversity.
The surprise drop in the jobless rate led former GeneralElectric CEO Jack Welch to suggest in a tweet that the numbershad somehow been doctored. "These Chicago guys will doanything," he said in a reference to Obama's campaign operation.Welch is a Reuters columnist.
Alan Krueger, a top economic adviser to Obama, said it wasirresponsible to question the credibility of the numbers."That's a ludicrous comment. No serious person believes that theBureau of Labor Statistics manipulates its statistics," he toldReuters Insider television.
Economists also dismissed the conspiracy theory.
Economists pay attention to the larger survey of employerswhich they consider a good yardstick of employment. However,they say the household survey tends to lead the survey ofemployers when there is a change in the trend.
FED LIKELY TO KEEP FOOT ON THE GAS
Persistently poor labor market conditions led the Fed inSeptember to announce a plan to buy $40 billion worth ofmortgage-backed securities each month until it sees a sustainedturnaround in employment.
Despite the brighter signs on the jobs market, the centralbank is unlikely to back off its stimulus anytime soon. Afterits September meeting, it said it planned to keep policy easyfor "a considerable time" even after the recovery strengthened.
"This will be welcome news for the Fed, but given that theunemployment rate remains well above levels deemed consistentwith full employment, their policy stance is unlikely tochange," said Millan Mulraine, a senior economist at TDSecurities in New York.
The Fed's ultra-easy stance has started to free up credit,supporting retail sales and construction.
Retail employment rose by 9,400, while construction added5,000 jobs. Record low mortgage rates on the back of the Fed'smonetary stimulus have spurred homebuilding.
There we also gains in transportation and warehousing jobs,which increased 17,100. Financial services employment increased13,000 and education and health payrolls surged 49,000.
Government payrolls rose 10,000 after increasing 45,000 inAugust. The gains last month largely reflected state and localgovernment teaching jobs.
However, temporary help jobs, which are often seen as aharbinger of permanent hiring, fell 2,000, and manufacturingpayrolls dropped 16,000, a second straight monthly decline. Joblosses in the computer and electronics and the transportationsectors led the manufacturing decline.
Average hourly earnings rose 7 cents last month, the largestincrease since June, which could support consumer spending, andthe length of the average work week also increased slightly,another sign of strength.
(Additional reporting by Patricia Zengerle and Andy Sullivan inWashington, Mark Felsenthal in Fairfax, Virginia and SteveHolland in Abingdon, Virginia; Editing by Tim Ahmann and AndreaRicci)
Keywords: USA ECONOMY/