Traders got a pleasant surprise today with news that U.S. employers expanded their payrolls for the first time in eight months. Economists had expected another drop.

The U.S. Labor Department says non-farm business payrolls rose by 57,000 last month, ending a seven-month streak in which nearly 500,000 jobs were cut. The unemployment rate came in at 6.1%, the same as August’s rate.

U.S. employers added jobs in all but a few major sectors. The manufacturing industry cut 29,000 jobs, the smallest number in more than a year. But the service-producing industry added 74,000 jobs, the largest increase since January.

BMO Nesbitt Burns points out that previous totals were revised a bit higher. As well, the job gains in the private sector were stronger than the headline number, up 72,000.

RBC Financial says that the gains were relatively widespread, with professional and business services leading the increase by adding 66,000 new jobs over the month. The manufacturing sector is still weak, dropping 29,000 jobs; however, the pace of the losses is slowing.

“There was one small step for US labor markets in September,” CIBC World Markets says, “but September’s net hiring is still at least 100,000 jobs shy of what would constitute a ‘good’ report, one consistent with a trend decline in unemployment.”

It also notes that Labor announced that the March 2003 level for payrolls is expected to be reduced by 145,000 after revisions to earlier months are published next February. “As a result, the level for payrolls entering into September, including upward revisions to August, was about 100,000 lower than earlier thought.”

RBC says that markets were largely anticipating an upward revision in order to help reconcile the divergence between the gains seen in the household survey versus the losses seen in the establishment survey earlier this year. “Despite the gain in today’s establishment data, and the curious reduction in this month’s household data, the gap between these two measures remains wide, leaving all questions as to why still unanswered,” RBC admits.

Nevertheless, economists are generally encouraged by this data. “This report shows the economy is just beginning to swing from cost cutting to full-fledged strong expansion mode,” comments Nesbitt.

Temporary hiring is up, which economists say usually precedes full-time hiring. “However, as a note of caution, this is not necessarily the case,” RBC warns. “The reluctance to hire full-time staff may also be a sign of persistent uncertainty and lack of business confidence.”

“Our sense is that for subsequent months, expectations will now be set for small increases, raising the bar for what will be judged as a positive payrolls report,” CIBC concludes.