Paulson: Economy faces headwinds but growing

Treasury Secretary Henry Paulson in Washington, December 3, 2007. Paulson on Tuesday said he did not expect housing prices to revert to their mean level after the sharp run-up in recent years, although the sector had seen a long run of unsustainable growth.

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson conceded on Tuesday the economy was being buffeted by "headwinds" but said the Bush administration has not yet decided whether it needs new stimulus measures.

"The economic data is mixed. We're watching this very closely," Paulson said on CNBC television. "We're facing strong headwinds but the economy is going to continue to grow."

Pressed to say whether the White House will act to boost economic activity, Paulson would only say the issue was under consideration. He said a plan to offer mortgage relief to less credit-worthy Americans might be broadened because there was no sign that a slump in home building and prices was easing.

"We're considering various options in order to do everything we can to keep this economy growing," he said.

The Treasury chief spent an hour on television offering his reassurances that growth would continue, but was challenged by the head of the prestigious National Bureau of Economic Research, who said recession risks were rising.

"I think we're not in a recession now," said Martin Feldstein, a Harvard professor who heads the private-sector NBER, which determines when recessions occur. He agreed with Paulson that slow growth lies ahead but warned it might be so feeble that it does not continue.

"For the next quarter or so that (slow growth) is the most likely outcome, but I think there is a serious risk that it could get worse than that and we could see an actual downturn," Feldstein said.

Some type of fiscal stimulus is needed to avert a potential recession, he added, along with more interest-rate cuts from the Federal Reserve.

The U.S. central bank has cut benchmark overnight interest rates by a cumulative 1 percentage point, to 4.25 percent, since mid-September and is expected to lower them again this month.

Feldstein said what was needed now was a "small down payment" with a fiscal stimulus plan that could be put in place quickly, but that a larger package should be put together that would be triggered if the economy actually turned down.

President George W. Bush gave hope to the possibility of an economic stimulus package when he said last week the White House was weighing all options to boost the economy.

On Tuesday, Paulson was at pains to say that he was not going to preempt whatever Bush might order, if anything.

"I don't think it's right for me to get out front of the president. This is the president's decision and he's been focused on the economy throughout his term in office," Paulson said.

JOB PROSPECTS DIMMING

Bush is scheduled to deliver the annual State of the Union message to Congress on January 28, potentially a prime venue for unveiling new measures to demonstrate a shared concern over the havoc wreaked by a weak housing market, rising energy prices and diminished job growth.

Last Friday, the government reported that only 18,000 jobs were created in December and that the unemployment rate jumped to a two-year high 5 percent.

"The consumer is facing a number of challenges right now," Paulson said. "The housing market (is) by far the biggest risk, credit turmoil in the credit markets, the jobs number, energy prices ... but yet right through the fall consumer spending, business spending (was) very solid."

Paulson, who said on Monday a decline in housing markets was "inevitable" after years of soaring prices and sloppy lending practices, said prices were unlikely to regain their bounce any time soon.

"There's no evidence that it's improving or bottoming and I think the evidence would indicate that it's got further to run." he said.

Paulson said a government-brokered plan to help ward off an anticipated wave of home foreclosures among credit-worthy Americans who took out so-called "subprime" loans might have to be expanded to offer protection to regular mortgage holders.

With 1.8 million mortgages due to reset at higher interest rates this year and next, "one thing we will consider ... is maybe expanding this beyond the subprime borrowers to other borrowers," Paulson said.

He saw no fast relief for troubled homeowners.

"There is no silver bullet. There's nothing we can do to let us avoid the problem that is implicit" in the sharp run-up in U.S. housing prices in recent years.

During a wide-ranging discussion, he defended a "strategic economic dialogue" with China that he initiated in 2006.

"We are achieving results with the SED that we wouldn't have otherwise," Paulson said, noting that it was helping improve product quality standards for Chinese-made goods that faced multiple recalls last year because of safety concerns.

In response to questions, he said China should let its yuan currency's value rise more rapidly. But he said the key influence on a rising U.S. deficit on trade with China was economic imbalances.

(Reporting by Tim Ahmann and Glenn Somerville; Editing by Dan Grebler)