Officials say job fall won't stall economy

By David Lawder

WASHINGTON (Reuters) - Bush administration officials on Friday sought to ease concerns about the economy after a government report showed the labor market shed jobs for the first time in four years last month.

Treasury Secretary Henry Paulson said he was not totally surprised about the job decline in August given housing troubles and less government hiring, but said he still saw the economy as healthy and growing.

The moribund housing sector "is going to extract a penalty on growth, and what we are going through in the credit markets is very apt to extract a penalty on growth, but the economy is going to continue to grow in the second half of the year," Paulson told Bloomberg television.

Paulson reiterated previous statements that he believed it would take some time to work through problems in housing and the credit markets, but the backdrop of a strong U.S. economy, aided by good wage growth and strong export demand, would help.

Another administration official, White House economic adviser Ed Lazear, also downplayed chances of recession, despite Friday's release of the weakest monthly payrolls data since August 2003 -- a decline of 4,000 non-farm jobs.

"There's always a chance of recession. We don't think it is likely," Lazear told CNBC television.

In an interview with Reuters, Commerce Secretary Carlos Gutierrez said the economy was benefiting from rising exports and that consumer spending was holding up.

"The economic fundamentals are solid and they say that the likelihood of growth and of expansion is a lot greater than recession," he said.

Paulson said he met Federal Reserve Chairman Ben Bernanke for breakfast on Friday, a meeting scheduled prior to the release of the payrolls data. The Treasury chief declined to discuss Bernanke's reaction to the jobs data but added that he has "great confidence in what's going on at the Fed."

TALKING TO BANKERS, BROKERS

Paulson, a Wall Street investment banker for 32 years, said he is now spending a lot of time talking with market participants to try to find ways to help capital markets function properly after the U.S. subprime mortgage crisis sparked a broad pullback in lending.

"I'm focused on the asset-backed paper market, some of the more complex products, those parts of the credit markets and the capital markets that aren't functioning as normal, and we are vigilant there," Paulson said.

He said he has seen "some modest improvement" in these markets but it would take time for the problems to be worked out.

But Paulson cautioned against over-regulation in the subprime mortgage sector and other credit markets that could stifle financial innovation. He said the Treasury was studying these issues very carefully.

"Let's not overreact and do something that is going to make credit much more difficult to come by for a big sector of our population for which home ownership is very very important," he said.

Asked whether U.S. housing finance giants Fannie Mae and Freddie Mac should be allowed to expand their loan portfolios to buy up distressed subprime debt, Paulson said he was talking with the government-sponsored enterprises to find ways for them to help ease the current crisis.

"In the current situation the way to help is to say, 'are there ways for them to provide loans that will be relevant to the subprime sector?"' he said.

Currently Fannie and Freddie invest in 30-year fixed mortgages that conform to strict guidelines and have a limit of $417,000. Some key U.S. lawmakers have called for their loan-size limits to be increased as well as for portfolio caps to be lifted.

Paulson repeatedly has opposed allowing Fannie and Freddie to expand their portfolios. He told Bloomberg Television that allowing them to expand into the subprime sector would require creation of a much stronger regulator, a process that has been stalled in Congress.

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