New York City's economic dependence on Wall Street

Challenge, March-April, 1999

Office of the State Deputy Comptroller

The Capital of Finance

No city in the world has benefited more from this decade's historic stock market boom than New York City. Wall Street investment banks and stock brokerage firms have been the driving economic force in pulling the city out of its early 1990s slump, when it suffered a 10 percent drop in private-sector jobs. As the financial capital of the United States, New York City was in a position to reap the fiscal dividends of surging financial markets that moved it from chronic budget stress earlier in the decade to record surpluses in the past two years.

The city also has seen considerable economic vitality beyond Wall Street, with a revitalized Times square anchoring a flourishing entertainment and media sector, downtown and Flatiron district "Silicon Alleys," and a bustling tourist trade. Job growth in New York City, which had lagged behind the U.S. pace since the mid-1980s, recently picked up to its fastest clip since the 1950s. Unemployment, however, remains stubbornly high, averaging 8 percent over the past year.

Even though Wall Street has not been the sole source of direct job creation, various empirical measures underscore its overwhelming centrality in the city's resurgence. To an unprecedented extent, the city has become dependent on Wall Street for economic and fiscal stimulus in the 1990s. This dependence now exceeds what it was in the 1980s, another period of feverish expansion in the financial industry, which culminated in the 1987 stock market crash that contributed heavily to the city's steep 1989-92 downturn.

The turning point for the city's economic expansion coincided with the meltdown in emerging market finance and the Federal Reserve-blessed takeover of Long Term Capital Management LP. As the air escapes from the global financial-market bubble, New York City is already starting to see signs of trouble ahead. Brokerage firms and banks have watched their profitability plummet, with the ensuing retrenchment pushing more and more Wall Streeters out the door and pulling down stratospheric compensation levels for those who remain.

Wall Street in the 1980s

After the back-to-back recessions of the early 1980s, New York City rebounded and added nearly 250,000 jobs during the expansion period of 1983 through 1988. As Table 1 indicates, even though the city's gross product growth roughly matched that of the United States in both the 1980s and 1990s expansions, the city's job growth fell short of the nation's in both decades. Fueled largely by high earnings within its financial and corporate headquarters sectors, per-capita real personal income grew slightly faster in the city than in the nation during both expansions.

Table 1

Comparison of N.Y.C. and U.S. Indicators for Expansions in the 1980s
and 1990s (Average annual changes)

                                 1983-88              1992-97(*)
                          New York     United    New York     United
                            City       States      City       States

Real gross city product and real gross domestic product
Percent change               3.8         4.1        2.9          2.9

Real per capita personal income
Percent change               3.4         3.0        1.8          1.6

Total employment
Percent change               1.4         3.1        0.8          2.4
Difference (000s)           49.9     3,011.8       26.0      2,734.2

Private employment
Percent change               1.2         3.4        1.4          2.7
Difference (000s)           35.2     2,708.6       37.8      2,529.0

Sources: U.S. Department of Commerce, U.S. Department of Labor, New
York State Department of Labor, New York City Office of Management
and Budget.

* The 1990s expansion continued into 1998.

What is striking, however, is that for almost all these measures, growth in the 1980s expansion was stronger than in the current decade. This holds true for both the city and the nation. Output, or gross product, growth was about one-third stronger in the 1980s. The one exception to this pattern is private job growth in New York City, which has been stronger in the 1990s than in the last decade. Government employment, which has declined steadily throughout the 1990s, had grown by more than 73,000 in the 1980s expansion period as the city restored jobs lost during the 1970s fiscal crisis.

The protracted bear market early in the 1970s was a factor (although probably not the main one, compared to the out-migration of several corporate headquarters) in the worst economic slide for the city in the post-World War II era. Wall Street, defined as the securities industry - which includes investment banks and securities brokerage firms - added jobs at a rapid clip in the 1980s. Employment doubled to almost 160,000 at its peak in 1987. Employment in securities fell after the 1987 stock market crash and has only recently surpassed its 1987 level. Wall Street bonuses represented a smaller portion of total wages paid during the 1980s than in the 1990s. During the 1983-88 period, bonuses accounted for almost 21 percent of total wages paid in the securities industry compared with 33 percent for 1992-97. Until the 1987 stock market crash, bonuses rarely were half as much as securities industry profits [ILLUSTRATION FOR FIGURE 1 OMITTED].