WASHINGTON (Reuters) - U.S. job growth likely picked up modestly in January and the unemployment rate held steady, supporting views the economy's sluggish recovery was on track despite a surprise contraction in the final three months of 2012.
Non-farm payrolls are expected to have increased by 160,000 last month after rising 155,000 in December, according to a Reuters survey of economists. The jobless rate is expected to have held steady at 7.8 percent for a third straight month.
The closely watched report comes on the heels of data on Wednesday showing a surprise contraction in gross domestic product in the fourth quarter, but the jobs data should soothe any worries the economy was at risk of recession.
"Even if it's not spectacular, it would be encouraging because it would enable us to further write off the GDP report as not telling us anything useful about what's happening in the economy," said John Ryding, chief economist at RDQ Economics in New York.
GDP contracted at a 0.1 percent annual rate in the fourth quarter, largely because of a sharp slowdown in the pace of inventory accumulation and a plunge in defense spending.
A monster 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 signaled optimism the recovery would regain speed with continued monetary policy support. The Fed left in place a monthly $85 billion bond-buying stimulus plan.
The Labor Department will release the January employment report at 8:30 a.m. (1330 GMT) It will also publish benchmark revisions to payrolls data going back to 2008.
In a preliminary estimate in September, it said there were likely 386,000 more jobs created in the 12 months through March 2012 than initially reported.
The department will also introduce new population factors for its survey of households from which the unemployment rate is calculated. This will affect the size of the labor force and the household survey's estimate of the number of people employed and unemployed. However, the jobless rate will not be affected.
"The adjustments won't recast the overarching story of this recovery, which is it's insufficient to keep up, much less reduce, the underutilization of our labor force," said Patrick O'Keefe, head of economic research at CohnReznick in Roseland, New Jersey.
Job growth in 2012 averaged 153,000 a month, little changed from the prior year and not enough to significantly reduce unemployment. Economists say employment gains in excess of 250,000 a month over a sustained period are needed.
Though the unemployment rate dropped 0.5 percentage point last year, 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 percent for almost four years.
All the anticipated job gains in January are expected to be in the private sector, where hiring is believed to have been as broad-based as it was in December.
"That broadening is encouraging. We are not going to make meaningful headway in terms of returning our unemployed people to work until we see an across-the-board gain in all sectors and a slowdown in public sector declines," said O'Keefe.
Improved jobs growth could help the economy weather the headwinds of higher taxes and government spending cuts. A payroll tax cut expired on January 1 and big automatic spending cuts are set to take hold in March unless Congress acts.
The goods-producing sector is expected to show a second month of solid gains, with manufacturing employment advancing for a fourth straight month. Construction payrolls are expected to have added to December's healthy 30,000 gain.
Within the vast private services sector, an improvement in retail jobs from December's slump is unlikely, given hefty gains between September and November. Education and health payrolls are expected to have eased off from December's 10-month high.
Government payrolls are expected to have dropped by about 5,000 last month after falling 13,000 in December. The pace is moderating as local government layoffs, outside education, subside.
Average hourly earnings are projected to have risen 0.2 percent last month after increasing 0.3 percent in December. Hourly earnings ticked up at the end of 2012, climbing 2.1 percent in the 12 months through December up from 1.9 percent in November.
"It may be that we are now getting to a point in the labor market where we are going to see an upward creep in average hourly earnings," said RDQ Economics' Ryding. "That's going to be good for the consumer and they need help because they are being whacked by the payrolls tax increase."
The length of the average workweek is expected to have held steady at 34.5 hours after edging up in December.
Reporting by Lucia Mutikani; Editing by Kenneth Barry