Paulson admits U.S. economy in sharp decline

U.S. Secretary of Treasury Henry Paulson speaks after attending the President's Working Group on Financial Markets at the White House in Washington March 17, 2008.

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson on Tuesday described the economy as being in "sharp decline," the closest he has come yet to conceding an election-year recession has set in.

Appearing tired after a weekend of helping to broker a fire sale takeover of Wall Street investment bank Bear Stearns to keep it from outright collapse, Paulson pushed back against efforts to have him admit a recession was under way.

"There's no doubt that the American people know that the economy has turned down sharply. So to me much less important is the label that's placed on it today. Much more important is what we do about it," he told NBC's Today Show.

Paulson also appeared on ABC's "Good Morning America" where he claimed the Bush administration's $152-billion fiscal stimulus program could generate hundreds of thousands of jobs once tax rebate checks begin flowing in May.

"It will start making a difference here in the second and third quarter, maybe adding 500,000 or more jobs," he said without elaborating about the sectors that might create jobs.

Checks of $600 for individuals and $1,200 for couples are to start being issued on May 2.

Treasury officials, in cooperation with the Federal Reserve, worked nonstop last weekend to help engineer the $2-a-share takeover of Bear Stearns by JPMorgan as they sought to restore some stability to shell-shocked financial markets.

Fed policy-makers were meeting on Tuesday amid expectations their next step will be to slash interest rates by a whopping 1 percent to try to give the flagging U.S. economy a lift.

But the turbulence that persists in markets, analysts say, stems substantially from a loss of confidence that has made ordinary investors wary and threatens to become an outright credit crunch as banks and financial institutions become reluctant to make loans or to take risks.

Paulson insisted Treasury was "all over" the turbulence in capital markets and said he did not think Bear Stearns shareholders believe they have been bailed out by the Federal Reserve.

"The big focus on the part of all policy makers is to minimize the spillover to the real economy. We need to keep our capital markets stable, functioning well," Paulson told NBC.

He said he had great confidence in U.S. capital markets, saying they were resilient and flexible, but it would take some time to work through the turbulence.

The latest evidence on Tuesday pointed to continuing and extended problems for economic policy-makers. Government data showed so-called core wholesale prices, excluding food and energy, measured by the Producer Price Index climbed at the fastest pace in February in more than a year.

Construction starts on new houses declined another 0.6 percent and applications for building permits tumbled 7.8 percent in February, an indicator that the deterioration in the U.S. housing sector will continue to worsen for some time.

(Reporting by David Lawder and Andy Sullivan; Writing by Glenn Somerville; Editing by Chizu Nomiyama)