The government's new estimate for the October-December quarter illustrates how growing state budget crises could hold back the economic recovery.
The Commerce Department reported Friday that economic growth increased at an annual rate of 2.8 percent in the final quarter of last year. That was down from the initial estimate of 3.2 percent.
The weaker figure was disappointing and prompted some economists to lower their forecasts for economic growth in the current January-March quarter.
State and local governments, wrestling with budget shortfalls, cut spending at a 2.4 percent pace. That was much deeper than the 0.9 percent annualized cut first estimated and was the most since the start of 2010.
Consumers spent a little less than first thought. Their spending rose at a rate of 4.1 percent, slightly smaller than the initial estimate of 4.4 percent. Still, it was the best showing since 2006. And it suggests Americans will play a larger role this year in helping the economy grow, especially with more money from a Social Security tax cut.
Rising energy prices also pose a danger. If oil prices were to rise to $150 or more a barrel and then stay there for months, another recession is possible, economists said. Gasoline prices would near $5 a gallon. Consumers and businesses would spend much less, and some employers might slash jobs.
"Consumers stumbled a bit to start the year, and while we expect them to pick up the pace some in coming months, the recent rise in energy prices poses a notable headwind," said economist Michael Feroli at JP Morgan Chase Bank.
Overall economic growth in the October-December quarter was marginally better than the 2.6 percent pace logged in the prior quarter. The economy has steadily grown after hitting a difficult patch last spring. But rising oil prices and budget cuts by state and local government are creating headwinds.
Feroli and other analysts now predict the economy will grow at a pace around 3.5 percent in the January-March quarter. That's down from earlier estimates in the 4 percent-plus range.
Government stimulus is fading and budget cuts at the federal level could further hamper economic growth.
The federal government trimmed spending at the end of the year, entirely reflecting cuts to defense spending. And a showdown over the U.S. budget is taking place on Capitol Hill between Democrats and Republicans, threatening a government shutdown.
For all of last year, the economy grew 2.8 percent, the most in five years, according to revised figures. That was down a bit from the 2.9 percent growth first estimated a month ago. However, it was an improvement from 2009 when the economy suffered its worst decline in more than 60 years.
Still, economic growth must be stronger to make a noticeable dent in unemployment, which was 9 percent last month. The economy would need to grow 5 percent for a whole year to significantly bring down the unemployment rate. Economic growth of just 3 percent a year would hold the unemployment steady and keep up with population growth.
Looking ahead the economy is expected to grow by 3.2 percent this year, according to an AP Economy Survey.