UPDATE 1-S&P sees lower 2013 growth for US state and local govts

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Oct 9 (Reuters) - Standard & Poor's Ratings Services said onTuesday it expected state and local governments in the UnitedStates to grow less in 2013 than previously forecast.

Cuts in public sector workforces as well as a focus byfamilies on fixing their budgets instead of spending are keyfactors in the reduced growth expectations, S&P said in areport.

State and local public employment has fallen 3.2 percentsince peaking in August 2008, representing "a source of drag ongrowth prospects," S&P said.

The credit rating agency said it expects that the nationaleconomy will have expanded by 2.2 percent in 2012, up from the2.0 percent growth rate it predicted in July.

However, S&P also says it expects U.S. gross domesticproduct to grow 1.8 percent in 2013, down from the 2.0 percentexpansion it forecast in July.

Federal spending, some of which goes to fund state and localprojects, is also expected to be cut 3.2 percent in 2013,compared to the 3.0 percent reductions that S&P forecast inJuly.

"While we believe that most state and local governments willnavigate this with their credit quality intact ... we continueto expect some to experience financial distress," the creditrating agency said.

Municipalities with less flexibility to raise revenue willhave fewer fiscal options. Additional risks include thepotential for financial contagion from the euro zone crisis,slower economic growth in China than policymakers want, and thefiscal cliff.

(Reporting by Hilary Russ; Editing by James Dalgleish)


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