In a speech to business executives in Washington, Paulson said the drag from housing, which he characterized as still the biggest risk to the economy, will soon be lessened by nearly $100 billion in economic stimulus payments to U.S. households.
"The fiscal stimulus will provide support to the economy as we weather the housing correction, capital markets turmoil and higher energy and food prices," Paulson said in his prepared remarks.
The economy has been pushed to the brink of a recession by a prolonged housing slump, a credit crisis, soaring energy prices and more than a quarter-million job layoffs over the past four months.
In his remarks, Paulson never used the word recession, although many private economists believe the country is in one.
But he did forecast that the stimulus checks going to 130 million households would help spur growth in the second half of the year. He said that those checks along with business tax breaks in the $168 billion stimulus package would add 500,000 jobs by the end of the year over what would have been created without the stimulus boost.
"Although we are still working through housing and capital markets issues, and expect to be doing so for some time, we also expect to see a faster pace of economic growth before the end of the year," he said.
Paulson said that both the ability to obtain loans and investor confidence are gradually improving, raising hopes that the financial market crisis which hit last August was beginning to recede.
"We are seeing signs of progress as capital markets and credit markets stabilize," Paulson said. "The markets are considerably calmer now than they were in March."
In March, the credit crisis claimed its biggest victim with the near-collapse of Bear Stearns, the country's fifth largest investment bank.
Paulson said "some bumps in the road ahead" are to be expected, but that he believes significant progress in dealing with the credit crisis has been made.
"In my judgment, we are closer to the end of the market turmoil than the beginning," he said. "Looking forward, I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions and, specifically, by the recovery of the housing sector."