The US economy added 171,000 jobs in October as the last big economic number before election day pointed to modest improvement in the labour market.

The unemployment rate ticked back up to 7.9 per cent – after a large drop to 7.8 per cent last month – as the survey recorded a large increase in the labour force.

The figures mean that President Barack Obama has navigated the last economic pitfall before next Tuesday’s vote and will face re-election with an unemployment rate below 8 per cent.

US markets opened higher initially, but gains fizzled out in the first hour of trading as optimism over the better than expected data faded. The S&P 500 index was 0.2 per cent lower 1,425.48.

For the economy, the numbers are encouraging, and imply that the labour market has been resilient to the recent slowdown in business investment and exports. Analysts had forecast an increase of 125,000 jobs last month.

James Marple, senior economist at TD Economics, said: “Ignore the naysayers, the US economy is showing incredible resilience in the face of significant challenges. Despite acute uncertainty over the fate of the fiscal cliff and a struggling global economy, America continues to generate jobs at a respectable pace.”

Payrolls growth for the two previous months was revised upwards by a total of 84,000 jobs, suggesting that the economy had a little more momentum than previously thought. The rise in the labour force, with an extra 578,000 people saying they were working or looking for work, is also a promising sign.

Jim Baird, at Plante Moran Financial Advisors, said: “Over the course of the last two months, workers have been returning to the labour force, which has grown by an estimated 1m individuals since the beginning of September. It appears that the long-anticipated return of discouraged workers to the workforce may be starting.”

The labour force participation rate rose from 63.6 per cent to 63.8 per cent. That suggests there may be enough jobs on offer to lure people who had given up on looking for work back into the labour market.

The unemployment rate will fall less rapidly if more people return to the labour force but it will reduce the chance that some people become unemployable and suggest that the productive capacity of the US economy has not been damaged by the recession.

Manufacturing employment rose for the first time in several months, adding 13,000 jobs, and job growth was spread across industries with 36,400 jobs in retail, 51,000 in business services and 32,500 in healthcare. Government employment fell by 13,000.

However, average hourly earnings fell slightly, showing that despite the slow improvement in the labour market conditions are still too weak to generate strong growth in wages.

Additional reporting by Vivianne Rodrigues in New York

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