US admits economy is in downturn

The US Treasury Secretary sees tough times ahead

US Treasury Secretary Henry Paulson has admitted that the US economy is facing a "sharp decline" at the moment but hopes for a recovery later in the year.

The news comes after the US central bank, the Federal Reserve intervened to rescue troubled bank Bear Stearns, providing $30bn in emergency support.

Mr Paulson said that he did not believe investors saw the move as a bail-out.

The Fed later slashed its main interest rate by 0.75 percentage points to boost confidence in financial markets.

We know we're in a sharp downclimb and there's no doubt that the American people know that the economy has turned down Hank Paulson, US Treasury Secretary Readers' financial woes The global credit crunch in figures

Bank profits

Meanwhile, two other leading Wall Street banks reported sharply reduced profits for the first three months of the year.

Goldman Sachs posted earnings of $1.5bn, down more than 50%, while Lehman Brothers, whose shares had fallen sharply on Monday, earned $489m, or 60% less than in the same period last year.

But the numbers were not as bad as expected, lifting Wall Street shares.

The Dow Jones stock index jumped more than 200 points, or almost 2%, to 12, 209.3. The wider Standard & Poor's index and technology-dominated Nasdaq also rose.

Following news of the rate cut, however, share prices lost some of their gains.

More rate cuts

Economists had predicted that the main US interest rate would be cut by up to one percentage point from 3% to 2%.

However, in its fifth rate cut since the credit crunch started, the Federal Reserve cut back to a rate of 2.25%.

On Tuesday Mr Paulson had been touring the US breakfast television studios in an attempt to reassure markets and consumers about the economic situation.

"We know we're in a sharp downclimb and there's no doubt that the American people know that the economy has turned down," he said.

He said that policy was focused on calming the financial markets.

"The big focus on the part of all policy makers is to minimise the spillover to the real economy," he added.

Slowing economy

Mr Paulson declined to use the word recession to characterise the US economy, but recent polls of both economists and the public have revealed that they disagree.

The latest economic figures to suggest a sharp slowdown were the industrial production figures, published on Monday, which fell by 0.5% in February.

US job growth was also negative in February, but Mr Paulson said he expected the economic package and further rate cuts to lead to 500,000 more jobs this year.

But the Fed also faces worrying pressures over inflation.

US producer prices, released on Tuesday, rose by 0.3% in February compared to the month before, but a key measure of producer core inflation rose by 0.5%, the fastest pace in well over a year.

Confidence

MAIN SUB-PRIME LOSSES SO FAR Citigroup: $18bn HSBC: $17bn Merrill Lynch: $14.1bn UBS: $18.4bn Morgan Stanley $9.4bn Credit Agricole: $5bn Deutsche Bank: $3.2bn Bank of America: $3bn Barclays: $2.6bn Royal Bank of Scotland: $2.6bn Freddie Mac: $2bn JP Morgan Chase: $3.2bn Credit Suisse: $1.8bn Wachovia: $1.1bn IKB: $2.6bn Source: Company reports Timeline: Sub-prime crisis Q&A: Bear Stearns crisis

The US Federal Reserve has been trying to restore confidence in the banking business.

Before Tuesday it had already cut interest rates from 5.25% to 3%.

Banks have been unwilling to lend to each other because they are worried about losses on investments backed by US mortgages.

Those investments have been hit by the slump in the US housing market.

New figures showed that housing starts and building permits fell, the latter to the lowest annual rate since 1991.

"The housing industry is in a recession," said Josh Stiles, bond strategist at IDEAGlobal.

"There is no reason for the Fed not to be aggressive," said Mark Zandi, chief economist at Moody's Economy.com.

"The economy is in a recession, the financial system is in disarray and inflation is low," he added.