US employment grew modestly in January and gains in the prior two months were bigger than initially reported, supporting views the economy's sluggish recovery was on track.

Employers added 157,000 jobs to their payrolls last month, the Labor Department said. There were 127,000 more jobs created in November and December than previously reported.

The unemployment rate, however, edged up 0.1 percentage point to 7.9 per cent.

The closely watched report also showed an increase in hourly earnings and solid gains in construction and retail employment.

"This is actually a really good number when you take into account the net upward revision," said Terry Sheehan, an economic analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.

Stock index futures added to gains on the report, while prices for US Treasury debt traded slightly higher and the dollar extended losses against the euro.

Coming on the heels of data on Wednesday showing a surprise contraction in gross domestic product in the fourth quarter, that should ease any worries the economy was at risk of recession, even though the unemployment rate ticked up.

GDP contracted at a 0.1 per cent annual rate in the fourth quarter, largely because of a sharp slowdown in the pace of inventory accumulation and a plunge in defence spending. A storm that hit the East Coast in late October also weighed on output, a drag that should lift this quarter.

Federal Reserve officials said on Wednesday that economic activity had "paused," but they signalled optimism the recovery would regain speed with continued monetary policy support. The Fed left in place a monthly $85 billion bond-buying stimulus plan.

"This shows that underneath the surface, the fourth-quarter economy was really pretty good despite all the defence cuts. I think the private sector is leading the way," said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.

Economists polled by Reuters had expected employers to add 160,000 jobs and the unemployment rate to hold steady at 7.8 per cent last month.

The Labor Department also published benchmark revisions to payrolls data going back to 2008. It said the employment level in March 2012 was 422,000 higher on a seasonally adjusted basis than previously reported. It also introduced new population factors for its survey of households from which the unemployment rate is calculated. This had a negligible effect on the major household survey measures.

Job growth in 2012 averaged 181,000 a month, but not enough to significantly reduce unemployment and prompt the Fed to the pull back on its bond-buying programme. Economists say employment gains in excess of 250,000 a month over a sustained period are needed.

Though the unemployment rate dropped from a peak of 10 per cent in October 2009, that was mostly because some unemployed Americans gave up the search for work because of weak job prospects.

The share of the working age population with a job has been below 60 per cent for almost four years.

All the job gains in January were in the private sector, where hiring was as broad-based as it was in December and declines in public sector employment remained moderate. Steady job gains could help the economy weather the headwinds of higher taxes and government spending cuts.

A payroll tax cut expired on January 1st and big automatic spending cuts are set to take hold in March unless Congress acts.

Reuters