The Labor Department Friday said monthly payrolls fell by 4,000 jobs, sending shock waves through financial markets that were anticipating growth of 110,000 jobs.
Nonetheless, Paulson said the economy was fundamentally healthy, and that would provide a good backdrop for working through problems in the housing and credit markets, a process which would take time.
"There's always a chance of recession. We don't think it is likely," White House economic adviser Ed Lazear told CNBC television.
Commerce Secretary Carlos Gutierrez, in an interview with Reuters, 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.
The Treasury's assistant secretary for economic policy, Philip Swagel, joined the chorus, saying private forecasts showed housing and credit woes shaving "somewhere on the order of a couple tenths of a percentage point" off growth in the second half of 2007 to the 2 percent to 2.5 percent range.
"In part this reflects that so far the credit disruption has been important for people most affected by it, but it hasn't affected the entire economy yet. Larger corporations still have pretty good access to capital," Swagel said.
He said the biggest declines in housing have already occurred, so its effect on future growth rates may diminish.
Paulson ate breakfast with Federal Reserve Chairman Ben Bernanke Friday, a meeting scheduled prior to the payrolls release. 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're vigilant there," Paulson said.
He said he has seen "some modest improvement" in these markets but it would take time to return them to normal. 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.
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.