President Barack Obama's hopes for reelection got a significant boost on Friday as unemployment fell to levels not seen since his maiden days in office.

It was as good a report card as the White House dared hope for.

The Labor Department announced that unemployment fell to 8.5 percent in December and the economy had created around 200,000 jobs.

That was the lowest unemployment rate since February 2009 -- a month that began with the words of Obama's inaugural address still ringing in Americans' ears.

Even better for the White House, the report came as Republicans battling fiercely to secure their party's nomination and challenge Obama in November's election found one of their principal lines of attack muffled -- that Obama's policies are exacerbating joblessness.

"We are making progress, we are moving in the right direction," Obama said, while acknowledging that problems linked to the Great Recession were not yet licked.

"There are a lot of people who are still hurting out there. After losing eight million jobs in the recession, obviously we have a lot more work to do."

That caution comes from the near certainty that Obama's fate will depend on whether the economy improves or the gains are reversed.

"The administration must be ecstatic that joblessness has fallen noticeably over the last few months, though it could prove too little too late," said Stephen Stanley, chief economist of Pierpont Securities.

Stanley, along other economists, the White House and most of Washington is now trying to figure out what the next months will bring.

If the jobs picture were to improve at last year's modest rate, unemployment could be under eight percent by election time, an important psychological barrier that would dull Republicans allegations that Obama has mismanaged the economy.

But after shocks from the Middle East revolutions and Japan's tsunami and earthquake, few are discounting the damage Europe's debt crisis could also do.

There is also cause for concern at home.

"We saw unemployment fall this month, but it did not fall in a statistically significant way," said Princeton professor Betsey Stevenson, who until September was the chief economist at Obama's Labor Department.

"If you look at job growth over the course of the year we were adding enough, basically, on average to keep up with growth in the labor force."

Stevenson also voiced concern that men and university graduates seem to be snapping up what few jobs come on the market.

"Things have really stalled for women. Some of that is due to the continued loss of government-sector jobs, where women are disproportionately found."

That trend has fed into a worrying increase in the number of people out of work for a long time.

"The number of long-term unemployed in December -- 5.6 million -- is still astonishingly high by post-war standards," said Brookings' economist Gary Burtless. "Nonetheless, it has fallen 17 percent since reaching a peak in the spring of 2010."

According to Stevenson, "Given how many millions of people are among the long-term unemployed, we would still have a serious national problem even if the labor market completely recovered."

With those pockets of continued strife, the Obama administration has tried to step carefully in describing economic success stories.

According to a recent Rasmussen poll 58 percent of Americans say the US economy is in recession, even though the National Bureau of Economic Research judged the recession actually ended in June 2009.

Managing expectations are an important part of the administration's job and the recovery itself, according to Stevenson.

"We know some of the economy is a self fulfilling prophesy," she told AFP. "You want people to be optimistic, because if they feel optimistic they are going to hire and they are going to spend, then the economy will be doing well."

For Republicans, the situation also spells a difficult balancing act between appearing to keen to talk down the economy and being too soft on Obama.

On Friday they reluctantly welcomed the report, but were quick to argue that it came in spite of Obama's policies, not because of it.

"It's good news that more Americans found work last month despite a sluggish economy," said the House of Representatives Speaker John Boehner.