Economy seen improving in second half of '08

By Surojit Gupta and Rajkumar Ray

NEW DELHI (Reuters) - The U.S. economy could improve slightly in the second half of 2008 after a challenging first half, and there are some encouraging signs in the credit markets, a senior U.S. Treasury Department official said on Thursday.

Speaking in the Indian capital, David McCormick, Under Secretary for International Affairs, said the second half improvement would be due to a fiscal stimulus of $150 billion, which would help create 500,000 new jobs in 2008. "Hopefully it will be an important stimulant to the economy," he said.

The U.S. economy is facing a prolonged housing market downturn and credit and liquidity problems in the money markets, and high global oil prices are also taking their toll.

But McCormick said he was encouraged in recent weeks by a modest improvement in credit market liquidity.

"We are still at a very difficult time in the credit markets but we have seen some positive signs," he said.

The International Monetary Fund expects U.S. economic growth to slow to 0.5 percent in 2008 from 2.2 percent last year.

To counter the problems faced by the world's largest economy, the Federal Reserve has cut its benchmark interest rate by 300 basis points since September and is expected to cut the Fed funds rate further at its meeting next week.

It has also provided billion of dollars in liquid funds to near-frozen markets and stepped in to prevent the collapse of investment bank Bear Stearns.