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(Reuters) – 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 despite a surprise contraction in output in the final three months of 2012.

Other data on Friday also suggested the recovery was intact, with factory activity hitting a nine-month high in January on strong new order growth. Consumer confidence perked.

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

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

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

“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.

The Institute for Supply Management said its index of national factory activity rose to 53.1 last month, the highest level since April, from 50.2 in December. That offered hope manufacturing will continue to support the economy.

U.S. stocks rose on the fairly upbeat reports and the dollar advanced against the yen. U.S. Treasury debt prices were trading higher as the rise in the unemployment rate suggested the Federal Reserve would maintain its easy monetary policy stance.

OUTPUT CONTRACTION SEEN AS A FLUKE

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

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.

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

Fed 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.

Economists polled by Reuters had expected employers to add 160,000 jobs and the unemployment rate to hold steady at 7.8 percent 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. Average job growth in 2012 was raised to 181,000 a month from 153,000.

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.

MODEST JOB GROWTH

Economists say employment gains in excess of 250,000 a month over a sustained period are needed to significantly reduce unemployment.

Though the unemployment rate dropped from a peak of 10 percent 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 percent 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 1 and big automatic spending cuts are set to take hold in March unless Congress acts.

The goods-producing sector showed a third month of solid gains, with manufacturing employment advancing for a fourth straight month. Construction payrolls increased 28,000, adding to December’s healthy 30,000 gain.

Construction jobs are expected to rise further as the housing market recovery gains momentum. Housing is expected to support the economy this year, taking over the baton from manufacturing.

Within the vast private services sector, retail jobs increased by a solid 32,600 jobs after rising 11,200 in December. Retail employment has now risen for seven straight months.

Education and health payrolls added 25,000 jobs in January after employment grew by the most in 10 months in December.

Government payrolls dropped by 9,000 last month after falling 6,000 in December. The pace is moderating as local government layoffs, outside education, subside.

Average hourly earnings rose four cents last month. Hourly earnings have been rising steadily. They were up 2.1 percent in the 12 months through January.

“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 John Ryding, chief economist at RDQ Economics in New York.

“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 workweek for the average worker was steady at 34.4 hours for a third straight month.

(Additional reporting by Ellen Freilich and Steven C. Johnson, and Leah Schnurr in New York; Editing by Andrea Ricci)