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S&P: State and Local Government Forecast 'A Little Brighter'

Standard & Poor's has revised its growth forecast upward for most regions in the United States.

In addition, the agency's economists have revised their 12-month horizon risk of recession to 10% to 15%, down from 15% to 20%.

"This somewhat improved outlook reflects the bottoming out of housing prices and the resultant stronger-than-expected 'knock-on' effects for four household spending," analysts said in, a report published Thursday. "This positive shift also partly reflects the macroeconomic effects of comments from the Federal Open Market Committee about its intention to use unemployment and inflation rates as guideposts for setting the federal funds rate."

Also citing to the housing recovery and the Fed's policy stance, Standard & Poor's is projecting higher real gross domestic product growth in 2013 at 3.0%, which is 1.2% higher than the October forecast. Analysts said they see a reduced likelihood of recession, meaning state budget proposals can realistically assume real GDP for the nation of 2.0% or higher.

"For most states, this translates to more positive growth prospects for personal income and, therefore, tax revenues," the report said.

However, they added, some states are still facing structural mismatches between revenues and spending, and state budgets are still in repair mode.

The single largest sectorwide risk to credit quality and local governments in 2013 are cutbacks in federal spending, the report said. For local governments, the risk is less direct, as they are somewhat less sensitive to the real-time performance of the economy.

"While the existing structure of the sequestration cuts could undermine economic growth prospects and result in less funding for federal special education programs and various discretionary grants, their effect on state and local government general funds is actually relatively limited," analysts said. "However, should the composition of federal spending cuts be changed to include Medicaid, the fiscal outlook for states could deteriorate substantially."

Standard & Poor's also raised its projection for consumer spending growth slightly by 0.4% as a result of the Fed's commitment to keeping rates low, although this is slightly offset by the expiration of the payroll tax holiday. This is due to a likely upward bump in sales taxes for state and local governments due to purchases of bigger ticket items, such as cars, the report said.

Among the specific regions, Standard & Poor's projects the strongest growth in 2013 in the Pacific region, which includes Alaska, Hawaii, Washington, Oregon, and California.

Analysts project that growth will slow to 2.1%, but the region will still outpace much of the nation in terms of both output and employment for the next two years, with GDP growth projected to reach 2.9% in 2014. They also project a 46% increase in housing starts, which are the number of new privately owned houses.

In 2014, the agency projects the strongest growth will be in the Mountain region, which includes Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming.

New England, which includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont, has the weakest growth prospects when compared with other regions nationally. Standard & Poor's forecasts that nonfarm employment will likely increase by 0.81% in 2013, and GDP growth will remain positive in 2013, slightly increasing in 2014.

In New Jersey, New York, and Pennsylvania, Standard & Poor's economic expansion forecast of 1.6% remains close to its October projection. The pace of job gains has weakened, the forecast for payroll growth is down, and the economic impact of Hurricane Sandy is still being determined.

In other regions, Standard & Poor's is projecting unemployment rates to decline, and mostly moderate economic growth.

Also on Thursday, Fitch Ratings said it has maintained its stable outlook on most 2013 United States public finance sectors.

"The last minute resolution of the fiscal cliff lessens concerns about the U.S. economy falling into recession and removes the economic risk of a large-scale federal personal income tax increase. But fiscal, economic and regulatory uncertainties continue to be an immediate threat to the 2013 public finance outlooks," said Rich Raphael, managing director, U.S. Public Finance Group.

"If the automatic spending cuts now scheduled for March 1 take effect, Fitch does not expect a near-term impact on ratings. However, a significant multi-year federal deficit reduction plan poses a more formidable risk to the economies and budgets of states, particularly if cuts to large spending programs like Medicaid are included. Local governments could bear the brunt of federal cuts to states if the states reduce aid to the locals."

The outlook on states, nonprofit hospitals and healthcare systems, retirement communities, public power, water systems, and higher education sectors is stable. The outlook on housing finance agencies is negative.

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