WASHINGTON (REUTERS) - US employers stepped up hiring in May, a sign the economy was growing modestly but not strong enough to convince the Federal Reserve to scale back the amount of cash it is pumping into the banking system.

The United States added 175,000 jobs in May, Labour Department data showed on Friday, just above the median forecast in a Reuters poll.

The unemployment rate ticked a tenth of a percentage point higher to 7.6 per cent, with the increase actually giving a relatively hopeful sign as it was driven by more workers entering the labour force.

Still, after a winter in which the economy seemed to be turning a corner, May was the third straight month that payrolls outside the farm sector increased by less than 200,000.

That could heighten concerns government austerity this year is sapping vigour from the economy, and might dampen speculation the Fed might soon trim bond purchases aimed at lowering interest rates and boosting employment.

Officials at the US central bank have intimated they could be close to reducing bond purchases despite modest economic growth, which is not expected to pick up until late in the year when the sting from government spending cuts begins to fade.

Budget cuts have led to hiring freezes at many government agencies, and attrition could be slowly reducing payrolls.

Government payrolls declined by 3,000 in May.

About 4.4 million Americans have been unemployed for more than six months, roughly 3 million more than pre-recession levels.

The longer workers are out of a job, the greater the risk they become essentially unemployable. That could deal lasting damage to the economy and has lent urgency to the Fed's efforts to stimulate growth.

Still, May's pace of job growth is right around the average for the prior 12 months. Over that period, the jobless rate fell about half a percentage point and the ranks of the long-term unemployed declined by about 1 million people.

"It's progress that's too slow, but it's progress nonetheless," Mr Guy Berger, an economist at RBS, in Stamford, Connecticut, said before the data was released.

Even the increase in the unemployment rate had a bright side. The share of the population in the labour force - which includes people who are either employed or looking for work - rose to 63.4 per cent. That was driven by 420,000 workers entering the work force. That is good news because some of the recent drop in the jobless rate has been due to workers leaving the labour force, either because they retired, went back to school or gave up looking for a job.

The report showed the length of the average workweek held steady at 34.5 hours, although total hours worked in the economy ticked 0.1 per cent higher.

At the same time, US factories are feeling the pinch from Europe's debt crisis, which has sent a chill over the global economy. Manufacturing employment declined by 8,000 jobs last month.

After barely growing in the last three months of 2012, the US economy expanded at a moderate 2.4 per cent annual rate in the first quarter but lost momentum as the quarter drew to a close. Most economists look for growth of around 1.5 per cent in the current quarter.

Fed officials next meet from June 18-19 and are widely expected to keep purchasing US$85 billion (S$105.5 billion) in bonds a month. Many economists do not expect the job market to be strong enough for the Fed to begin scaling back its bond purchases before December.