By Timothy R. Homan

Feb. 5 (Bloomberg) — The unemployment rate in the U.S. unexpectedly dropped to 9.7 percent in January, indicating the labor market may be poised to climb out of its deepest slump since World War II.

More than half a million Americans found work, a Labor Department report showed today in Washington, helping push the jobless rate to the lowest since August. A separate survey of employers showed payrolls declined by 20,000 as construction companies and state and local governments cut back.

Manufacturers hired more workers for the first time in three years, expanded hours and boosted pay, which may lift consumer spending and sustain growth. Revisions to previous data increased the number of jobs lost in the recession to 8.4 million, adding impetus to the Obama administration’s push for fresh government measures to boost employment.

“Companies just can’t meet demand requirements with their existing labor force, so they have to increase the number of workers,” said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York, whose forecast for a 9.8 percent unemployment rate was the most optimistic in a Bloomberg survey. “This report does seem to indicate the economy is moving in the right direction.”

The dollar rose 0.3 percent to 89.28 yen at 12:48 p.m. in New York from 89.05 yesterday. The Standard & Poor’s 500 Index fell 0.5 percent to 1,057.7 as concern European governments will struggle to fund deficits overshadowed the unexpected decrease in the unemployment rate.

Economists’ Forecasts

The jobless rate was forecast to be unchanged at 10 percent, according to the median estimate of 84 economists surveyed by Bloomberg News. Payrolls were projected to increase by 15,000.

Companies such as Cisco Systems Inc. plan to add staff as businesses update equipment and stimulus plans revive sales worldwide. San Jose, California-based Cisco, the biggest maker of networking equipment, predicted accelerating sales growth and said it will hire 2,000 to 3,000 people in the next several quarters.

“Almost every country is saying their momentum is better than it was before, and almost every business is saying it’s more optimistic,” Chief Executive Officer John Chambers said in an interview this week. “It shows a capital spending trend that’s hard to deny, on a global basis.”

The survey of households showed employment increased by 541,000 workers last month and the number of people in the labor force rose. The gain brought the participation rate, or the share of the population in the workforce, up to 64.7 percent from 64.6 percent.

‘Cautious Confidence’

Labor Secretary Hilda Solis called the decline in the unemployment rate a sign of “very cautious confidence.”

“It’s still unacceptably high and we’re going to continue to work on that,” Solis said in an interview with Bloomberg Television.

President Barack Obama has called job creation his top priority this year as administration projections forecast the unemployment rate to average 10 percent through 2010.

Obama will today back a temporary increase in Small Business Administration Loans from $350,000 to $1 million to encourage small business hiring, an administration official said. The president has previously endorsed $33 billion in small business tax cuts and incentives for hiring as well as a plan to use $30 billion of bailout money paid back by Wall Street financial institutions to help community banks make loans to small businesses.

Jobs Lost

More than 4 million jobs have been lost since Obama took office in January 2009, today’s figures showed. Early last year, Obama’s economic advisers forecast the $787 billion stimulus plan would keep unemployment below 8 percent.

“The long winter of this Great Recession seems to be drawing to a close,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “There is no ‘new normal’ or structural impediment to this recovery.”

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., has said the loss of consumer confidence caused by the financial crisis will lower the potential growth rate to 2 percent from more than 2.5 percent and raise long-term unemployment in what he called the “new normal” for the world’s largest economy.

Rebuilding Capacity

The need to rebuild industrial capacity after the largest decline on record in 2009 may spur hiring further as companies including Texas Instruments Inc. invest in machinery and equipment to meet growing demand.

Dallas-based Texas Instruments is hiring 250 workers to open a new chip-manufacturing plant in Richardson, Texas, that will eventually employ 1,000. It’s also expanding three other plants in the state.

Factory payrolls increased 11,000 in January, the biggest gain since April 2006, after falling 23,000 in the prior month. The median forecast by economists called for a drop of 20,000.

Capital spending will increase the total productive capacity of the U.S. economy above its pre-recession level of December 2007, helping gross domestic product grow at a 2.7 percent annual rate in 2010, according to the median forecast of 67 economists in a Jan. 14 Bloomberg News survey. That would be the fastest rate since 2006.

Government Payrolls

Government payrolls decreased by 8,000 in January, today’s report showed. State and local governments reduced employment by 41,000, while the federal government added 33,000. The increase at the federal level reflected in part the hiring of temporary workers to conduct the 2010 census.

Payrolls at builders fell 75,000 last month after decreasing 32,000. Financial firms reduced payrolls by 16,000, after a 7,000 decline. Service industries, which include banks, insurance companies, restaurants and retailers, added 40,000 workers after subtracting 96,000 in December.

Retail payrolls increased by 42,000 after an 18,000 decline.

The number of temporary workers increased 52,000 in January. Payrolls at temporary-help agencies often turn up before total employment because companies prefer to see a steady increase in demand before taking on permanent staff.

Underemployment Rate

The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — fell to 16.5 percent from 17.3 percent.

Employment declined a revised 150,000 in December and increased 64,000 a month earlier. The revisions subtracted 5,000 from payroll figures previously reported for those two months.

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