In New York, Wall Street Bailout Softens the Blow of a Recession
In fall 2008, after Lehman Brothers collapsed and other Wall Street firms seemed ready to topple, New York appeared to be headed for a brutal recession, one that would rival the worst downturns in the city’s history.
Now city officials and private economists are revising their forecasts with a drastic change in tone. The gathering consensus is that the recession is nearly over in the city and, largely because of the enormous amount of federal aid poured into the big banks, the toll on New York will be much less severe than most had feared.
Not only will the job losses in the city fall far short of the recession that wracked the metropolitan area in the early 1990s, economists and analysts say they will also not measure up to the losses in the shorter, shallower recession that surrounded the 9/11 attacks. Where once the projections called for employment in the city to decline by as many as 300,000 jobs, they now estimate the losses will be about 200,000.
Nobody is playing down the damage that the financial crisis has caused in the city. The unemployment rate hit 10.6 percent in December, more residents are unemployed than at any time in at least 34 years, and the city and the state are cutting services to bridge growing budget gaps.
But the primary measure of the local impact of a recession has always been how many jobs it wiped out; on that score, this recession has been significantly milder in New York than in the rest of the United States. The most closely watched forecasters now expect the city to follow the nation out of recession in the next few months without having suffered as much as other large cities in big states like California, Florida and Illinois.
“We’ve been surprised, too, that the city economy hasn’t been hit harder than it has, given that Wall Street was at the center of the financial crisis and panic,” said Mark Zandi, chief economist for Moody’s Economy.com. “Of course, there have been lots of layoffs on Wall Street, but not nearly as significant as in past recessions.”
Mr. Zandi said he expected the job losses in the metropolitan area to end within a couple of months and to amount to less than 4 percent of the region’s total employment at the peak of the last boom. By contrast, the nation lost more than 6 percent of its jobs over the last two years.
City officials agree. Mayor Michael R. Bloomberg and his lieutenants have been telling audiences that the recession will cost the city 100,000 fewer jobs than they had forecast a year ago.
They have also pointed to other signs that the city weathered the crisis better than the nation. Tourism fell off only slightly last year and declined much less than in some other big cities, like Chicago. Housing prices have declined less than in most other regions. Office vacancy rates, though they have doubled in the last year, are still lower than in most other large American cities.
But the key indicator, economists said, is the number of jobs lost. “The job statistics are the most timely, accurate barometer of how the economy is doing broadly at a local or regional level,” Mr. Zandi said. “If you pick almost any economic statistic — income, house prices, construction activity — it would tell the same story: New York has gotten hit, but it hasn’t gotten creamed.”
And the city appears poised to track the national recovery more closely than in the last two recessions, when the city kept losing jobs for 12 to 18 months after the nation began to recover, said Ken McCarthy, managing director of New York-area research for Cushman & Wakefield. “If there’s any lag at all,” he said, “it’s going to be three to six months.”
Why has New York fared much better than many feared?
Economists say the hundreds of billions in loans and aid the federal government pumped into the city’s banks fueled a quick reversal of Wall Street’s fortunes. That turnaround saved thousands of high-paying jobs and the controversial bonuses that go with them, averting a sharper drop in tax collections and consumer spending that would have brought more layoffs. “A lot of us had expected there would be 60,000 or 70,000 jobs lost directly in the financial services sector,” said James Parrott, an economist with the Fiscal Policy Institute.
“Then there would have been a spillover effect,” he said, referring to the widely accepted idea that each job on Wall Street supports two others in and around the city.
Instead, employment in financial companies in the city has declined by only about 30,000 jobs, and some big banks have been hiring again. Some analysts say they think that some of the biggest banks in New York, like JPMorgan Chase and Goldman Sachs , have emerged in stronger relative positions than they held two years ago.
“To some degree, the city’s financial services sector has been strengthened by the crisis,” Mr. Zandi said.
“A lot of financial institutions in a lot of other parts of the country have evaporated,” he said, leaving the big New York banks to fill some of the lending void.
Through the infusions of capital into its banks, New York has been the biggest beneficiary of the federal assistance of the last two years, Mr. Zandi and other economists said.
“One could argue that no city in America got as much government help as New York City,” Mr. Zandi said.
Citigroup received $45 billion in aid. JPMorgan Chase borrowed $25 billion; Goldman Sachs and Morgan Stanley got $10 billion each. But each gained far more from the Federal Reserve’s policy of holding interest rates at very low levels all last year, helping them to amass record annual profits.
The bailout “didn’t prevent substantial losses,” Mr. Parrott said, “but they would have been greater without it.”
For a change, New Yorkers have no reason to complain about sending far more of their tax dollars to Washington than they get back, Mr. Parrott said. He said it was possible that New York recovered all of the surplus in its balance of payments to the federal government over the years.
Whether or not that is true, economists agree that the course of this recession was radically altered by the federal aid the banks received. Few are ready to say that the recession is over in the city, but they expect the recovery, slow and halting as it may be, to begin soon.
“I think it’s too soon to say, Was that all?” said Ronnie Lowenstein, director of the city’s Independent Budget Office. But she said people would look back on the recession that began two years ago and see that “it wasn’t as sharp a contraction as some people had anticipated.”
Ms. Lowenstein, whose agency was updating its forecast of the city’s financial condition for release this week, said she did not foresee the overall job loss being significantly larger than the 157,000 jobs in its last forecast. But she and other economists said they expected the city’s employment decline to be revised this month to be slightly larger than the current official estimate.