Job report a short-term boost for Obama: James Pethokoukis

-- James Pethokoukis is a Reuters columnist. The views expressed are his own.

By James Pethokoukis

WASHINGTON (Reuters) - Rising U.S. unemployment, to borrow a phrase, has been a giant vampire squid wrapped around the face of the Obama administration, sucking out its popularity and thus draining momentum from its legislative agenda.

But now the White House has gotten some good news from the jobs front. The unemployment rate in July unexpectedly fell to 9.4 percent from 9.5 percent in June. This breaks a string of 16 straight months where the unemployment rate had either risen or stayed flat, including every month of the Obama term. (Recall the rate was 7.6 percent in January.)

Now the economy still lost a quarter of a million jobs. And had the same number of people been looking for work in July as June, the rate would have risen. The broader unemployment rate is still over 16 percent.

But the news headlines will show the traditional jobless rate easing, making the approach toward double digits a bit slower and also more unlikely.

When the market was down, GDP collapsing and the unemployment rate soaring, it was tough for the White House to counter GOP claims that its stimulus plan was anything but a miserable failure.

Now Republicans have to make a tougher argument, that a) a "real" recovery plan would be working faster rather than this sugar high from government spending, and b) it's really the natural strength of the economy (with some help from monetary policy) taking over rather than anything the Democrats have done.

More of a muddle than "Obamanomics has done nothing!"

Moreover, to the extent that Obama looks like he is capably managing an actual recovery, it will also help momentum on healthcare and climate change. And certainly Democrats didn't want to see unemployment hit 10 percent right when healthcare crunch-time hits in the autumn.

There is a risk though that the White House and Capitol Hill Democrats might overplay the news. The unemployment rate is still double what Americans have become used to during the past generation.

The broader unemployment rate is at scary levels, particularly in states like Michigan and California. And this dip could be followed by a reversal.

After the 1990-91 recession ended, the unemployment rate took a similar dip, from 6.8 percent to 6.7 percent. But then it started rising again for the next year and half, eventually hitting 7.8 percent.

Here is how IHS Global Insight puts it: "The unemployment rate fell, but it is hard to believe that it has peaked already ... We will need to see sustained employment gains before concluding that unemployment has peaked, and that probably won't be until the first half of 2010 with unemployment above 10 percent."

Indeed, the White House is still forecasting 10 percent and keeping any public smiles over the jobs news to a minimum.

Still, if we get a Reagan style "V-shape" recovery and boom, Republicans are in deep trouble, though concerns about the deficit may give a bit of cover.

More likely: a good quarter or two followed by weak growth and continued high unemployment. The Long Recession Scenario, or 1990s Japan-lite.

Why? Still lots of economic uncertainty after the financial meltdown, the impact of huge deficits on interest rates, weak consumers, a dead housing market, and the high tax, high regulation Obama agenda, among other reasons.

Bottom line: The unemployment report provides a short-term boost to Obama's popularity and agenda, but does not change the likely scenario that on Election Day 2010 (maybe even 2012), voters will not be thrilled about the economy.

And to the extent the economy improves, will voters view it as a real turnaround, or one manufactured by unsustainable government spending, as with cash for clunkers?

For previous columns, Reuters customers can click on <PETHO/>

(Editing by Martin Langfield)