Standard & Poor's Ratings Services said on Tuesday it expected state and local governments in the United States to grow less in 2013 than previously forecast.
Cuts in public sector workforces as well as a focus by families on fixing their budgets instead of spending are key factors in the reduced growth expectations, S&P said in a report.
State and local public employment has fallen 3.2 percent since peaking in August 2008, representing "a source of drag on growth prospects," S&P said.
The credit rating agency said it expects that the national economy will have expanded by 2.2 percent in 2012, up from the 2.0 percent growth rate it predicted in July.
However, S&P also says it expects U.S. gross domestic product to grow 1.8 percent in 2013, down from the 2.0 percent expansion it forecast in July.
Federal spending, some of which goes to fund state and local projects, is also expected to be cut 3.2 percent in 2013, compared to the 3.0 percent reductions that S&P forecast in July.
"While we believe that most state and local governments will navigate this with their credit quality intact ... we continue to expect some to experience financial distress," the credit rating agency said.
Municipalities with less flexibility to raise revenue will have fewer fiscal options. Additional risks include the potential for financial contagion from the euro zone crisis, slower economic growth in China than policymakers want, and the fiscal cliff.
(Reporting by Hilary Russ; Editing by James Dalgleish)