While American investors reacted enthusiastically as the terms of a $700 billion (£380 billion) government bailout of the financial services industry were agreed in principle yesterday, leading experts gave warning that the country’s economic prospects remained in “dire straits.”

As the White House sought to prevent meltdown of the US economy by racing to push through its bailout plan, a series of damning statistics on housing, employment and orders for manufacturing goods were released, serving as a reminder that businesses were still in for a tough time.

Sean Egan, of Egan Jones Ratings, the ratings agency, said: “We are still in dire straits because it’s difficult to reverse the market direction.

“Although the bailout is a very substantial amount and is comforting from an investor perspective, it is relatively small when you consider the overall size of the market.”

The American mortgage and car financing markets, combined with related credit investments such as collateralised debt obligations — or pools of mortgage bonds — are about $20,000 billion, compared with $700 billion for the bailout.

Chris Whalen, of Institutional Risk Analytics, said: “The capital infusion will initially be met with much market approval. But a week after the deal the effects will wear off.”

Lou Crandall, the chief US economist of Wrightson Icap, said: “If they hadn’t agreed the bailout it is anybody’s guess how this would have played out. With a bailout agreed, it will at least make people a lot more confident.”

Joe Mason, Associate Professor of Finance at Drexel University, said that the problem facing the US economy was deeper than mere money. He added: “This deal is essentially about money and that can’t buy financial transparency and investor confidence. It may buy a bit of time but it isn’t going to last.

“The Government is just doing the same thing as it has before, helping to bail out the likes of Bear Stearns, Fannie Mae and Freddie Mac. It didn’t work before and it won’t work now.”

Professor Mason argued that areas such as bond ratings and accounting methods had to be genuinely reformed before confidence can return to the markets in the longer term and the economy can move forward.

The statement that a bailout had been basically agreed came after a morning of downbeat reports.

General Electric kicked off the bad news by issuing a profit warning that blamed “unprecedented weakness and volatility” in the credit markets. This was followed by data from the Commerce Department which showed that sales of new homes fell to a 17-year low in August.

Not long afterwards new figures revealed that orders for US durable consumer goods had dived during August and claims for unemployment benefits had jumped by 32,000 to 493,000 in the week ended September 20, their highest since the September 11 attacks.

George Davis, chief technical analyst for RBC Capital Markets in Toronto, said: “The data reinforce the slowdown in the US economy. It’s not looking too good.”

Guy Lebas, chief economist of Janney Montgomery Scott in Philadelphia, added that the latest data was “a recipe for recession”.

Mark Pervan, of Australia and New Zealand Banking Group, added that even with the bailout being agreed, “there is still a lot of uncertainty on its overall impact on the economy”.

The Fed’s next interest rate meeting is on October 28 and 29. Much is resting on the proposed bailout. Economists said that an emergency cut before the next meeting was not an option because it would panic the markets.

Carl Weinberg, chief economist for High Frequency Economics, the Wall Street consultancy, said: “I think that the Fed will need to cut rates by a further half-point over time but I expect there to be no change at its next meeting.”

Morgan Stanley cut its forecast for third-quarter US economic growth in half to an annualised rate of 0.5 per cent, after the release of yesterday’s data.

Markets spent much of the day transfixed by the fluctuating progress of the plan. News that an agreement was at hand drove US shares higher, with the Dow Jones industrial average adding 196.90 points to end the day at 11,022.10.

The FTSE 100 closed up 101.45 points at 5,197.02.

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