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Published: Friday, 2/25/2011 - Updated: 4 years ago

State, local budget woes slowing down U.S. recovery


WASHINGTON — Deeper spending cuts by state and local governments weighed down U.S. economic growth in the final three months of last year.

The government's new estimate for the October-December quarter shows how state-budget crises could hold back the recovery.

The Commerce Department reported Friday that economic growth increased at an annual rate of 2.8 percent in the final quarter of last year. That was down from the initial estimate of 3.2 percent.

The weaker figure was disappointing and led some economists to lower their forecasts for economic growth in the January-March quarter.

State and local governments, wrestling with shortfalls, cut spending at a 2.4 percent pace, much deeper than the 0.9 percent annualized cut first estimated and the most since the start of 2010.

Consumers spent a little less than first thought. Their spending rose at a rate of 4.1 percent, slightly smaller than the initial estimate of 4.4 percent. Still, it was the best showing since 2006, and it suggests Americans will play a larger role this year in helping the economy, especially with more money from a Social Security tax cut.

A key question is whether consumers can spend enough to help offset negative forces in the economy — notably struggling state and local governments and a wobbly housing market that has depressed home values.

Another danger is rising energy prices: If oil rises to $150 or more a barrel and stays there for months, economists say another recession is possible. Gaswould near $5 a gallon, meaning consumers and businesses would spend less and employers might slash jobs.

Overall economic growth in the October-December quarter was marginally better than the 2.6 percent pace logged in the prior quarter. The economy has grown after hitting a rough patch last spring, but oil prices and budget cuts by governments are creating headwinds.

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