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WASHINGTON, Aug 5 (Reuters) - State and local governments continued shedding thousands of jobs in July, part of a trend that analysts say could damage everything from trash collection to the entire U.S. economy.
"We are looking at the worst contraction of state and local government employment since 1981," said John Lonski, chief economist for Moody's Capital Markets Research.
"When state and local government spending and payrolls began to contract noticeably toward the middle of 1981, the second leg of the last double-dip recession began to materialize."
Lonski said the job loss -- states shed 23,000 jobs in July and local governments 16,000 -- coupled with spending cuts helped push up the chances the U.S. economy is entering a double-dip recession by 25 to 50 percent.
The U.S. government recently reported state and local gross domestic product shrank 3.4 percent in the second quarter of 2011. It has only expanded three out of the past 14 quarters.
In July, the U.S. unemployment rate fell to 9.1 percent and nonfarm payrolls netted 117,000 new jobs. Private sector payrolls, though, grew by 154,000 jobs, with public sector losses dragging down the total.
"We would be realizing a healthier rate of jobs expansion were it not for the ongoing contraction of state and local government," Lonski said.
State governments have been cutting jobs since November, and their current payrolls of 5.06 million are the lowest since March 2006. Local government employment now stands at 14.14 million, the smallest payrolls since June 2006.
"States and localities employ about 19 million people so, as a sector, it's comparable to health and education, or to the entire goods producing sector," said Philippa Dunne, co-editor of the economic newsletter The Liscio Report, which monitors state budgets. "No one needs to point out that we are in a weak recovery, so ongoing job losses in a major sector are not a trivial thing."
Dunne said more public job losses are likely on the way.
While states' revenues showed improvement in the first quarter of 2011, they are now weakening, Dunne said. Assistance from the 2009 economic stimulus plan, which included the largest transfer of funds from the federal government to states in U.S. history, has ended, as well. This all hinders state attempts to pull out of recent budget troubles.
The housing bust, financial crisis and recession devastated state and local tax revenues. For more than three years, states, cities and counties have cut spending, hiked taxes, borrowed and turned to the federal government for help in keeping their budgets balanced.
Now, with few places left to find savings, states are pulling back funds to local governments. Because all states except Vermont must balance their budgets, they had to close shortfalls that totaled more than $100 billion for the fiscal year that began, for most, in July.
"I don't see it reversing. The general consensus is that there's some sort of normalcy we're moving into," said Scott Smith, Mayor of Mesa, Arizona, which laid off more than 10 percent of its workforce last year and has frozen hiring.
Smith, also vice president of the U.S. Conference of Mayors, said many mayors have a sense job losses are leveling off. Still, he has yet to hear of any plans to rehire.
Layoffs essentially hamper cities' abilities to provide services, said Neil Bomberg, program director for human development at the National League of Cities, which represents cities and towns across the country. This may force them to cut areas such as trash collection or public safety, or scrounge to accomplish the same tasks with fewer workers.
"It's unlikely they're going to bring these people back very quickly, and so these people who are being laid off may in fact become part of the long-term unemployed," he said. (Editing by James Dalgleish)