Huffpost Homepage

Wall Street slide may puncture New York City economy

Posted: Updated:

By Joan Gralla

NEW YORK (Reuters) - New York City, whose economy rests on Wall Street's shoulders, has the most to fear from a confidence-rattling economic shock because the city's budget is prepared to adjust to a gradual decline, economists say.

The stock market's meltdown and the tens of thousands of layoffs announced by the city's hometown financial industry have not -- at least for now -- matched the stresses of 2008-2009.

"There's a difference in magnitude and certainly a difference in the financial situation," said James Brown, a labor analyst, at the state Department of Labor. Banks may not be earning as much as expected, but he said: "No one's sitting around talking about going out of business the next quarter."

What is not yet known is precisely how many bankers, traders, analysts and brokers will lose their jobs in the city. Pink slips likely will descend on many workers in other states and countries.

"Volatility and unpredictability is probably the best way to characterize where we are now," State Comptroller Thomas DiNapoli told Reuters.

New financial jobs may be created despite layoffs. Wall Street, which spent the last decade or so raising capital by going public, might revisit the 1980s strategy of opening boutiques.

Successful traders, hedge fund and private equity managers and the like have the means, contacts and ability to set up their own small shops, capitalizing on the likelihood that they will be much less regulated than their former employers.

Though Wall Street usually restarts the city's approximately $420 billion economy after a downturn, in the last cycle, that role was performed by the leisure and hospitality sector, followed by business services -- accounting, law, and advertising.

City Comptroller John Liu, citing the importance of the financial industry, said: "The financial industry's particular vulnerability to volatility is all the more reason the city must aggressively diversify its employment and economic base."

New York City's economy has also benefited from its universities and academic teaching hospitals, which added 23,700 jobs on a year-over-year basis through June.

The shrinking sectors were construction, manufacturing, government, information, and other services in this period.

Positive economic props for the city include juicy corporate profits that revived business travel. The sliding dollar is luring more foreigners; the city's marketing arm says tourism could top or match last year's record of 48 million global and domestic visitors. They added $31.5 billion to the city's economy -- nearly half of its current $66 billion budget.

The ailing dollar also prompts foreigners to buy city apartments which can cost less than in Tokyo and London.

Cash transactions, part of the city's trading culture, are more common than elsewhere, economists say. It's not just "I can get it for you wholesale," but "It's off the books."

Construction workers, doormen, dog-walkers, nannies, maids, tutors, street fair vendors and a host of others likely add billions of dollars to the economy every year, economists say.


Yet a few statistics show why the city usually rides the same roller-coaster as Wall Street's profits.

Economists say each Wall Street job creates one to three jobs in the service sector, from florists to lawyers. "When Wall Street contracts, there's a reverberation in other sectors of the economy tied to Wall Street," DiNapoli said.

The city gets about 7 percent of its personal income tax and business tax revenue from this sector, he said. For each $1 million in bonuses, the city collects about $40,000 in taxes,

In 2010, cash bonuses averaged $128,530 per person.

And falling stock markets clip the city's economy by shrinking the bank accounts -- and tax bills -- of the city's well-to-do. Just 5,000 residents whose incomes topped $4 million a year paid nearly 39 percent of all the city's personal income taxes in 2007, according to the mayor.

Mayor Michael Bloomberg, once bashed for granting city workers overly fat pay hikes, now wins praise from analysts for raising reserves, ordering ten rounds of cuts since 2008, and budgeting conservatively. Standard & Poor's said in a report:

"New York City's recent budgets and financial plan updates incorporated weaker economic and revenue growth than has actually occurred and we believe the city has historically moved swiftly to address projected budget gaps."

While S&P estimated the mayor will have to close more than $14 billion of budget gaps from fiscal 2013 to 2015, it noted this pattern of future deficits has persisted since 1982.

(Reporting by Joan Gralla, Editing by Chizu Nomiyama)