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US Economy Shrinks 0.1 Pct., 1st Time In 3 ½ Years

Everything from the National Park Service to federal law enforcement to health research would be affected. Social Security and veterans' benefits, along with other entitlement programs, would be exempt.

Federal employees would face temporary layoffs, likely causing contracts to be delayed or canceled. Medicare providers like doctors and hospitals would have to absorb a cut in their payments. Job losses at some hospitals might follow.

And if the two parties don't agree on an extension of government funding by March 27, a shutdown could follow. Each week of a shutdown would slice a quarter-point from growth, Marple said.

Weaker growth could discourage companies from hiring, potentially raising the unemployment rate. The rate has been a painfully high 7.8 percent for two months. On Friday, the government will release the January jobs report.

Some trends, however, will offset the drag from reduced government spending. Exports, which dropped in the last quarter by the most in nearly four years, should rebound this year. China's economy is picking up after a brief slowdown and could help spur U.S. exports.

And home builders are stepping up construction to meet rising demand. That should create more construction jobs.

Home prices are rising steadily. That tends to make Americans feel wealthier and more likely to spend. Housing could add as much as 1 percentage point to economic growth this year.

In addition, auto sales reached their highest level in five years in 2012. That's boosting production and hiring at U.S. automakers and their suppliers.

The approach of the fiscal cliff last year had one benefit: Incomes jumped in the fourth quarter as companies paid out nearly $40 billion in special dividends and bonuses ahead of expected tax increases.

After-tax income, adjusted for inflation, rose 6.8 percent, the most in nearly four years. But incomes may fall in the current quarter because of the end of the Social Security tax cut.

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