* Employment rises by 171,000 jobs in October
* Gains for two prior months revised higher
* Jobless rate ticks up to 7.9 percent as more hunt for jobs
* Last major economic report card before Nov. 6 elections
WASHINGTON, Nov 2 (Reuters) - U.S. employers stepped up hiring in October and the jobless rate ticked higher as more workers restarted job hunts, a hopeful sign for a lackluster economy that has been a drag on President Barack Obama's re-election chances.
Employers added 171,000 people to their payrolls last month, the Labor Department said on Friday. The government also said 84,000 more jobs were created in August and September than previously estimated.
The jobless rate edged up a tenth of a point to 7.9 percent, but that was due to workers surging back into the labor force. Only people who are looking for a job count as unemployed.
``This report is consistent with the emerging picture of an economic recovery that is continuing to regain traction after grinding to a halt earlier this year,'' said Millan Mulraine, senior U.S. strategist at TD Securities in Toronto.
The employment data was the last major report card on the economy before Tuesday's presidential election. Polls show Obama and Republican Mitt Romney locked in a dead heat in a race in which the nation's feeble jobs market has been front and center.
``Really vigorous is a number like 250,000 to 300,000 jobs a month. This is simply not good enough,'' Romney economic adviser Glenn Hubbard told CNBC.
Alan Krueger, the head of Obama's Council of Economic Advisers, said the report showed the economy moving in the right direction. ``While more work remains to be done, today's employment report provides further evidence that the U.S. economy is continuing to heal,'' he said in a statement.
Despite the political wrangling, the impact of the report on the election will likely be muted as most voters' perceptions on the economy are likely fixed by now.
While the rise in the jobless rate was expected, the increase in payrolls beat even the most optimistic forecast in a Reuters poll. U.S. stocks opened higher but then turned down, while the dollar strengthened and prices for U.S. government were mostly lower.
GLASS HALF FULL OR HALF EMPTY?
A full recovery from the 2007-09 recession remains distant and even sustained monthly job gains of 171,000 would likely bring down the unemployment rate only slowly. The jobless rate, which peaked during the recession at 10 percent, remains about 3 percentage points above its pre-recession level.
Indeed, the persistently high unemployment rate has undercut wage growth. Average hourly earnings fell one cent last month to $23.58. Over the past year, they have risen just 1.6 percent, the lowest on records dating to early 2007. A narrower measure that looks at just production and non-supervisory employees is up only 1.1 percent, the lowest since at least 1964.
In October, the jobless rate rose because 578,000 people entered the workforce. That helped push the participation rate, a measure of the portion of the population in the labor force, up two tenths of a point to 63.8 percent. A gauge of the proportion of working age Americans who have a job hit a three-year high at 58.8 percent.
While the jobless rate rose, it only partially reversed a big drop in September. A broader measure of underemployment that includes the unemployed, people who can only get part-time work and people who want a job but who are not looking ticked down a tenth of a point to 14.6 percent, its lowest level since April. Still, that represents 23 million Americans.
All of the gain in payrolls was in the private sector, which added 184,000 jobs in October, the biggest increase since February. The government shed 13,000 positions.
Private service-providing jobs were up 163,000, with retail trade adding 36,400 jobs. Temporary help services, often a harbinger of future full-time hiring, added 13,600 jobs, more than reversing the previous month's decline.
The construction sector saw a 17,000 increase in jobs, the largest rise since January, while factories added 13,000 workers, snapping two straight months of decline.
Even with the stepped-up pace of job creation, the U.S. economy faces a real threat of a renewed recession next year.
Without action by lawmakers, taxes will rise and government spending will fall to the tune of about $600 billion. That ``fiscal cliff'' could easily cause the economy to contract.
Europe's debt crisis, which has hit factories around the world, including those in the United States, is also weighing on the U.S. recovery.
Given the uncertain outlook, businesses have been hesitant to invest. A separate report on Friday showed orders for non-defense capital goods, excluding aircraft, rose just 0.2 percent in September after a similarly tepid 0.3 percent gain in August.
Still, overall orders received by U.S. factories bounced back 4.8 percent, nearly reversing all of a deep slide seen in August.