By Lucia Mutikani
WASHINGTON (Reuters) - U.S. job growth likely improved only slightly in September as businesses remained cautious out of fear a sharp tightening of the government's budget could deliver a big blow to the economic recovery early next year.
Employers are expected to have added 113,000 jobs to their payrolls, an increase from 96,000 in August, with the unemployment rate edging up by a tenth of a percentage point to 8.2 percent, according to a Reuters survey of economists.
The data, to be released by the Labor Department at 8:30 a.m. (12.30 p.m. GMT) on Friday, would be troubling news for President Barack Obama with little more than a month to go before voters go to the polls, even though he has an edge over Republican challenger Mitt Romney.
"Businesses are starting to focus more on the fiscal cliff," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania. "It's really hard to identify the spark that's going to get us much stronger job growth until we get more clarity on the U.S. fiscal situation."
According to economists, hiring likely fell short of the pace needed to absorb both new and returning jobseekers, who are expected to swell the labor force and push the jobless rate higher. The workforce had shrank in the prior two months.
The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, is expected to rise off the 31-year low of 63.5 percent hit in August.
The sluggish hiring would add to signs that companies are keeping expansion plans on a tight leash out of concern the U.S. Congress might fail to avoid the automatic tax hikes and government spending cuts that will suck about $600 billion out of the economy next year.
"If employers are so uncertain about the future direction of their business that they are unwilling to commit to capital projects, it's is unlikely they will be eager to add permanent employees," said Julia Coronado, chief North America economist at BNP Paribas in New York.
Persistently poor labor market conditions prompted the Federal Reserve last month to announce a plan to buy $40 billion worth of mortgage-backed securities each month until it sees a sustained turnaround in employment. It hopes the purchases will drive down long-term borrowing costs and spur the recovery.
Economists said the September employment report would justify the Fed's stance, which also includes a commitment to keep overnight lending rates near zero until at least mid-2015.
Job growth was strong at the start of the year but began to brake abruptly in March. Over the six months through August, it averaged about 96,670 per month - well below the 125,000 normally needed just to hold the jobless rate steady.
The U.S. economy is still about 4.7 million jobs short of where it stood when the 2007-09 recession started, and the unemployment rate has been stuck above 8 percent for more than three years - the first time this has happened since the Great Depression.
Even so, consumer confidence has held up relatively well, and this appears to be helping Obama. A Reuters/Ipsos poll released on Friday showed Obama leading Romney among likely voters by 47 percent to 42 percent.
HIRING HIGHLY CONCENTRATED
September's job pattern is expected to be pretty much like August's. The diffusion index of private employment, which measures the proportion of industries that showed job gains during the month, dropped to a low of 50.2 percent in August from 70.3 percent at the beginning of the year.
"Hiring has become more concentrated, which leaves us vulnerable if we are leaning on one or two industries for support and if anything goes wrong," said Sweet.
Manufacturing payrolls are seen flat in September, after falling 15,000 in August - the first drop in almost a year. A sharp drop in the factory diffusion index in August suggested the broad gains in employment logged this year have narrowed.
Temporary help jobs, which are often seen the harbinger for permanent hiring, are expected to show an improvement after falling in August for the first time since March.
Little improvement is seen in construction employment, which has remained subdued even as home builders have been breaking ground on new projects at a slightly faster clip this year.
Government payrolls are again a wild card, given the tendency for cash strapped state and local governments to lump education job cuts into the beginning of the school year, when the model used by the government to smooth the data for seasonal variations expects big gains.
Government employment is expected to have declined by 17,000 last month after falling 7,000 in August. It would be the seventh straight month of declines in public sector jobs.
With the overall pace of job growth anemic, average hourly earnings are expected to have risen 0.2 percent last month after being flat in August.
(Editing by Tim Ahmann and Neil Stempleman)