Federal Reserve worry list gets longer

A fading recovery, persistently high gingko8 unemployment, Europe's debt troubles and commercial air jordan 10 real estate losses air jordan 11 have garnered most of the attention. But some Fed officials have begun talking more about another trouble zone -- recession-hit U.S. state and local government finances. The problem is that they have to balance their budgets, unlike the federal government, teach1 which is running a deficit equal to more than 10 percent of total economic output. "They the-placement have no choice but to cut spending or raise taxes -- or they get some more help from Washington," said Harm Bandholz, an economist with Unicredit in New York. He thinks state and local judyiloveyou government finances represent the most important domestic risk factor in the U.S. economy. Yet they received only two brief mentions in 19 pages of minutes few-sportsmen from the Fed's April policy-setting meeting. Minutes from the Fed's last Theclassassignment meeting, on June 22-23, set for soos-for release on Wednesday, are likely to show the central bank trimmed its economic watch-dealer growth forecast, largely because of a run achoreand of disappointing data and fears of a European slowdown. Bandholz said the Fed may be reluctant to say much more about state qwworld and local government budgets because that would involve treading into the realm of fiscal policy, which is the Treasury Department's responsibility. But they may draw more attention as the problem gets worse. Next year's state and local government budget gap is expected to reach $140 billion, or a little more than 1 percent of gross domestic eccentric-weight product. Considering economists expect GDP growth of only about 3 percent next year, that is a substantial hit. In the first quarter of 2010, the most recent period for which full data is available, state and local governments subtracted 0.5 percentage point from gross domestic product. That was ma-nisto equal to the reduction from duke8 commercial real estate, a primary area of concern for the Fed. (For a graphic on the GDP drag, see link.reuters.com/jyj76m) The Fed may get more rar-for evidence this week that the economy stumbled into the witha01 summer. Economists are predicting weak U.S. June retail sales and a small Hamilton-Electric decline in industrial output. Also on this week's agenda is a batch of Chinese designed-to statistics, including second-quarter GDP, which is forecast to slow to a still-hot 10.5 percent from 11.9 percent. GETTING WORSE Government budget cuts weigh Miles-Away on economic growth because they can lead to job losses and spending reductions, as well as higher taxes that constrain the-believe consumer and business spending. In the first quarter, state and local governments reduced spending at a 3.9 percent rate, the steepest drop Thomas-Kempis since 1981.