WASHINGTON • Just in time for the fall election campaigns, a new report Thursday showed jobless claims jumping unexpectedly, providing new fuel for the debate over what economic, fiscal and political path might lead the way to recovery.

First-time filings for unemployment benefits rose last week by 12,000, reaching 500,000 for the week, the highest level since last November. Economists had expected the claims to drop.

At the same time, a new nonpartisan update on the federal budget noted that one way to create jobs and boost the economy would be to extend some of the Bush-era tax cuts, which now are set to expire Dec. 31. The Congressional Budget Office said that extending some tax reductions and other tax measures would knock nearly a full percentage point off the unemployment rate next year, but at the cost of higher budget deficits and debt.

The two reports served as a stark reminder that jobs and the economy will dominate debate in Washington this fall as Congress weighs whether to extend the Bush-era tax cuts and the campaigns begin for control of Congress.

President Barack Obama, who told an audience in Wisconsin just days ago that "we're headed in the right direction" on the economy, said the jobs report underscored the need for Congress to pass a bill that would help small business by easing credit. He blamed Republicans for blocking it.

In its analysis, the nonpartisan CBO says it expects the economy to continue to grow by a meager 2 percent in the fourth quarter and that it doesn't expect the jobless rate to drop to 5 percent until the end of 2014.

"The recovery from the economic downturn will continue at a modest pace during the next few years," the budget office said.

A key question that Congress, the president and voters face is how tax reductions or increases will affect that growth, as well as the federal budget.

The CBO said the current year's deficit would top $1.3 trillion. It's 9.1 percent of the economy, however, the second-worst level in 65 years. The worst was last year, 9.9 percent.

Obama proposes making the Bush tax cuts permanent for individuals who earn less than $200,000 a year and couples who make less than $250,000. He would let the tax reductions expire for those who earn more than that.

Republicans — and some Democrats — want to make all the tax cuts permanent or at least to extend them as long as the economy remains fragile. They fear that a tax increase would hurt recovery.

In addition to the disappointing reports about the job market, a regional slowdown in manufacturing showed that the economic recovery was beginning to slow and that the job market would continue to be weak because of it.

The Federal Reserve Bank of Philadelphia's monthly index showed that manufacturing in the mid-Atlantic states shrank this month. The index fell to minus 7.7 points in August — its lowest level since July 2009 — from last month's 5.1 points.

"The Philly Fed number was just awful," said Randy Frederick, director of trading and derivatives at Charles Schwab. "The jobs number was bad, but not as far off the mark as the Philly number."

The disappointing economic reports followed the trend in which relatively weak data have confirmed a slow recovery.

"These numbers certainly were simply not good numbers," a market strategist for Prudential Financial, Quincy Krosby, said.

The news resulted in the Dow falling 144.33, or 1.4 percent, to 10,271.21. All 30 Dow stocks fell, only the ninth time that has happened this year.

The Standard & Poor's 500 index fell 18.53, or 1.7 percent, to 1,075.63, while the Nasdaq composite index fell 36.75, or 1.7 percent, to 2,178.95.

The New York Times and Associated Press contributed to this report.