PAWTUCKET, Rhode Island (Reuters) - The city of Pawtucket in Rhode Island offers a vivid glimpse into the depth of America’s worsening recession -- and a warning of the dangers of rising unemployment.

A woman walks past the entrance to the New Cafe bar in Pawtucket, Rhode Island December 2, 2008. Few U.S. states are feeling the financial crisis quite like Rhode Island, which boasts the nation's highest unemployment rate and where food banks report a 12 percent increase in people seeking emergency food. REUTERS/Brian Snyder

About 50 miles south of Boston, Pawtucket was a pioneer in America’s industrial revolution. Now more than 11 percent of its workforce is jobless, the worst anywhere in a state that rivals economically battered Michigan for the highest unemployment rate in the country.

Main Street is pockmarked by empty storefronts. In just 100 yards (meters), six shops have “for lease” signs in their windows and a 32,000-square-foot (2,973-square-meter) retail and office complex stands empty.

“I don’t have much business left,” said Sait Sado, 56, who repairs and alters clothing at Sado’s Tailor Shop. “I’ve worked this area for 26 years. I’ve never seen it like this.”

One business that’s busy on Main Street is a pawn shop.

“Business has been very good,” said David Katz, a clerk at Pawtucket Pawn Brokers. “You can see for yourself,” he said, pointing to shelves packed with televisions, stereos and music equipment. “We have been picking up for the past six or seven months. We’re also getting a lot of gold and jewelry.”

When President-elect Barack Obama puts his economic rescue plan together this month, he is expected to channel significant aid to state and local governments. Rhode Island illustrates the scale of the problem as many states consider dramatic cuts to local services to balance budgets.

Strained by a loss of tax revenue as unemployment worsens and real-estate values plummet, the state of 1 million people faces its biggest budget shortfall in 17 years, spending $1 million a day more than it collects and forecasting a $357-million budget deficit for the fiscal year to June 30.

That is projected to swell to $486 million in the 12 months from July 1, with lawmakers predicting the red ink will grow by about $80 million a year to reach a $770 million deficit in 2012 unless new revenue sources are found.

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Schools are bracing for cuts. Lawmakers have not ruled out tax increases and are warning cities and towns to tighten their belts. They are considering a big public works program, a consolidation of state services and possibly the nation’s only tax on residents for each mile they drive.

Under that tax proposal, residents would have to report their mileage and pay a fee when registering their vehicles every two years.

“You really have two choices in this state. You can try to cut more expenses which means that you are going to be laying off more people, or you are going to have to look at taxes,” said Edward Mazze, a professor of business administration at the University of Rhode Island.

“Anything else that we do now is eventually going to affect the local cities and towns, and the provision of every type of state service. And that in itself becomes a deterrent to attracting industry,” he added.

PROBLEMS ECHOED ACROSS U.S.

Rhode Island’s problems are echoed across the United States in various degrees. Data on Friday showed U.S. employers axed 533,000 jobs from payrolls in November, the most in 34 years, with unemployment reaching 6.7 percent, a 15-year high.

“With the exception of the states that are rich in oil and gas, you can pretty much say that all the states are revising their revenue downwards,” said Edith Behr, a senior credit officer at credit-ratings agency Moody’s Investors Service, which maintains a negative outlook on U.S. state governments.

At least 21 states face budget shortfalls this year. Some may cut spending by as much as 15 to 20 percent, Behr said in an interview. Utah, for example, is suspending all planned road construction that isn’t yet under construction.

But few feel the pain quite like Rhode Island, a southern neighbor to Massachusetts that lost its manufacturing base in the 1960s and 1970s and is struggling to find a new economic engine.

The state reported a record 53,000 people out of work in October and its unemployment rate of 9.3 percent tied with Michigan, home of the devastated auto industry, for the highest rate in the country. It reports November figures on December 19.

Demand for emergency food programs is growing.

About 47,000 households, or about 11 percent of the state, cannot afford food, said Andrew Schiff, executive director of the Rhode Island Community Food Bank, which reported a 12 percent rise in demand for emergency food in the year to August -- a gain of about 2,000 people per month on average.

“That trend is certainly continuing,” Schiff said in an interview, projecting the number of people seeking emergency food aid to double over the winter as home heating bills rise.

And few places in Rhode Island suffer as much as Pawtucket, a city of 73,000 people that earned a place in U.S. history by opening the nation’s first water-powered cotton textile mill in 1793, an event that many historians say marked the start of America’s Industrial Revolution.

It’s once-thriving textile industry is in steep decline. Unemployment has shot up to 11.3 percent -- doubling from a decade ago. At the city’s biggest food bank, the number of people looking for an extra bag of groceries to carry them through the month has climbed from about two a day before September to about five or six a day, activists say.

“It’s getting busier and busier,” said food bank worker Glenn Marmol at the nonprofit Blackstone Valley Community Action Program as he packed groceries for Maxima Gonzalez, a 36-year-old mother who lost her job three months ago.

“Even people who are already getting assistance from the state with food stamps are here because they need extra help,” he added.