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February 25, 2011 at 08:56 AM
WASHINGTON (AP) — 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 illustrates how growing state budget crises could hold back the economic recovery.
The Commerce Department reported Friday that economic growth increased at an annual rate of 2.8% in the final quarter of last year. That was down from the initial estimate of 3.2%.
The weaker figure was disappointing and prompted some economists to lower their forecasts for economic growth in the current January-March quarter.
State and local governments, wrestling with budget shortfalls, cut spending at a 2.4% pace. That was much deeper than the 0.9% annualized cut first estimated and was the most since the start of 2010.
Consumers spent a little less than first thought. Their spending rose at a rate of 4.1%, slightly smaller than the initial estimate of 4.4%. Still, it was the best showing since 2006. And it suggests Americans will play a larger role this year in helping the economy grow, especially with more money from a Social Security tax cut.
One of the crucial questions is whether consumers can spend enough this year to help offset negative forces in the economy — notably struggling state and local governments and a wobbly housing market that has depressed homes values.
Rising energy prices also pose a danger. If oil prices were to rise to $150 or more a barrel and then stay there for months, another recession is possible, economists said. Gasoline prices would near $5 a gallon. Consumers and businesses would spend much less, and some employers might slash jobs.
