New York Feels the Crunch

Credit makes the world go round, and no more so than in New York City, home of Wall Street. Can the city's economy withstand the crisis?

by Moira Herbst

Says one New York official: "When the city's financial sector catches cold, the city's overall economy catches something much worse." James Nicholas Sears

It's ugly on Wall Street. With the subprime mortgage meltdown, credit crunch, and falling stock market, investment bankers are facing the worst job losses since the months following September 11. In the wake of its near collapse last week, Bear Stearns (BSC) is expected to lay off at least half of its 14,000 employees. Citigroup (C) said on Mar. 20 that it plans to add 2,000 layoffs to the 4,200 it announced in January. And many bankers are wondering not only which firms will be hit next, but whether their own jobs are safe.

So how long before the rest of New York City gets whacked?

Thus far, much of the New York area has staved off the steep declines in home prices and employment that are sweeping so much of the U.S. But because jobs in finance account for about 23% of New York City's overall personal income and 27% of the city's tax revenues, eventually Wall Street's layoffs and busted bonuses will filter down to shops, restaurants, real estate brokers, limo drivers, and other Main Street employers. The falling value of the dollar—and the concomitant surge in tourism and foreign real estate purchases—will help cushion the blow to the overall economy. But since the primary business of New York is still the money business, it's inevitable that Wall Street's pain will be shared.

More Job Cuts on the Way

"It is hard to understate the impact of the financial industry on the New York City economy," says Ronnie Lowenstein, director of New York's Independent Budget Office, or IBO, an independent city agency. "When the city's financial sector catches cold, the city's overall economy catches something much worse."

In the first two months of 2008, more than 12,700 jobs related to the subprime mortgage market were cut in New York, according to the employment consulting firm Challenger, Gray & Christmas. The figure includes subprime mortgage-related layoffs at lenders like Countrywide Financial (CFC) and at investment banks like Lehman Brothers (LEH). More trouble is expected. Last month the IBO forecast losses of 21,000 jobs in New York's finance sector alone over the next two years. But Lowenstein says that's probably optimistic. The agency is in the process of reworking its estimates of potential job losses and will release new projections in May.

Meanwhile, global staffing firm Manpower (MAN) reports that New York City employers expect to hire at a sluggish pace in the second quarter of 2008. From April to June, 21% of employers expect to reduce their payrolls, according to Manpower spokesperson Greg Schneider.

Can Tourism Fill the Gap?

The last time Wall Street was hit this badly was in the aftermath of September 11. At that time, some companies quickly relocated outside the city, taking thousands of jobs with them. Tourism took a hit, with the number of foreign visitors falling from 6.8 million in 2000 to 4.8 million in 2003. Business travel dropped off, as did dining out and attendance at Broadway shows.

But the city economy bounced back stronger than ever, in part because the falling dollar has made New York City a top destination for foreign travelers (BusinessWeek.com, 2/28/08). In 2006, the most recent year for which figures are available, there were 7.3 million international visitors to New York City, an all-time record.

Will tourism and foreign spending be enough to help the city bounce back this time around? Some analysts say the depth and severity of the crisis are without precedent, making it tough to predict the fallout. "I don't think we've ever seen anything quite like this," says Lowenstein. "The difference is the contraction of credit. Credit is the raw material of finance and without it not much else happens."