US Unemployment Rate Falls To 7.8% In September - Good News With Flaws

U.S. unemployment rate unexpectedly fell to 7.8 percent in September, the lowest since President Barack Obama took office January 2009, while summer job gains were revised higher. The brighter tone on jobs could give a potential boost to Obama’s reelection campaign following a disappointing performance in the first presidential debate this week.

Overall, Friday’s report is a modest surprise, and the decline in the jobless rate is a positive development for the economy. While we are still not there yet, hopefully this is a sign of better things to come.

The big eye-opener in today's data is the 873,000 people in the household survey that claim they have found jobs -- the largest increase since June 1983, excluding the annual Census benchmarks. The household survey is used to calculate the unemployment rate, and the massive jump far outstripped a 418,000 rebound in the size of the labor force, which caused the jobless rate to plunge.

The Labor Department reported that the jobless rate fell dramatically from 8.1 percent in August to 7.8 percent, which means the rate has dropped 1.2 percentage points in 12 months -- the quickest since February 1995.

The big jump in the household survey is certainly a welcome sign. But take this data with a grain of salt, especially considering the volatile reputation this data point holds. Moreover, some 582,000 Americans took part-time positions because of slack business conditions or those jobs were the only work they could find.

Nonfarm payrolls, which are based on a survey of businesses and normally the most reliable part of the monthly jobs figures, showed the economy added a mediocre 114,000 jobs in September, just a touch higher than the 113,000 job gains economists polled by Thomson Reuters had expected.

It’s worth noting that the sampling error on the business establishment survey is plus or minus 100,000 jobs, while the sampling error on the household survey is plus or minus 280,000 jobs.

The biggest reason to pay attention to the always-quirky household survey is that it reflects what consumer confidence surveys have been indicating.

“But smoothing through the monthly volatility suggests the household survey and establishment survey are giving a similar picture of labor market conditions,” said Michael Gapen, senior U.S. economist with Barclays, in a note to clients.

There were several encouraging details in the report. On the establishment survey, job growth for July and August was revised upward, by 40,000 to 181,000 for July and by 46,000 to 142,000 for August. That suggests the economy was stronger than previously thought over the summer.

The labor force participation rate, which has been in steady decline since 2008 as discouraged, unemployed workers have given up their search for work and left the labor force, actually ticked up slightly this month to 63.6 percent from last month's reading of 63.5 percent -- the lowest rate in 31 years.

A closer look at the payroll report indicates the coming recovery of the service sector -- jobs in real estate and finance were up -- and construction while manufacturing falters because of slowing growth in global income.

In other words, the domestic-based economy appears to be beginning to stir in terms of adding employees.

Adding to the good news, average weekly hours worked edged back up to 34.5 last month, from 34.4, and average hourly earnings increased by a robust 0.3 percent month-over-month.

But it is still just one report. The economy appears to be grinding along at a pace that is universally unsatisfying and well short of the pace needed to ramp up the still lackluster pace of job creation.

This report is the first since the Federal Reserve unveiled a third round of quantitative easing -- buying $40 billion a month of mortgage-backed securities until the U.S. job market substantially improves.

While the latest numbers offer some good news the sharp decline in the unemployment rate will not change the calculus for the Fed at this stage. The central bank desires both a substantial and sustainable improvement in labor market conditions and would like to see the economy adding closer to 200,000 jobs a month.

In addition, the central tendency of Federal Open Market Committee projections has the long-run rate of unemployment at between 5.2 percent and 6.0 percent, suggesting that many on the committee feel they have a long way to go before beginning to reverse the stance of policy.

“We think the unemployment rate would need to decline further from here in the October and November reports before the Fed would think about not fully converting its Treasury purchases under Operation Twist to open-ended purchases,” Gapen said.

“In sum, the employment picture didn’t really change all that much with the September report, but there were enough shifts in enough pieces to suggest the glass can be viewed as half full rather than half empty,” said Steve Blitz, chief economist at ITG Investment Research.

Obama can say that the labor market is improving and point to the sharp drop in unemployment rate.

Republican presidential candidate Mitt Romney can note that the economy still isn't creating enough jobs to get anyone excited.

The last jobless report of the campaign -- for October -- comes out Nov. 2, just four days before Election Day.