New York City's economic dependence on Wall Street

Challenge, March-April, 1999

Table 4

Wall Street's Annual Direct Contribution to New York City's Real
Earnings Growth

Year                 Securities             Securities
                    earnings             share of total
              growth ($ billions)      earnings growth (%)

1992                  6.0                     59.7
1993                  0.6                      NM
1994                 (1.7)                     NM
1995                  3.9                     61.1
1996                  3.8                     56.4
1997                  4.8                     43.2

Sources: U.S. Department of Commerce; Office of the State Deputy
Comptroller analysis. NM = Not Meaningful

What Lies Ahead for a Wall Street City?

The lengthy U.S. economic expansion of the 1990s may be coming to an end, courtesy of financial market excesses rather than inflationary pressures that typically induce central bankers to take away the proverbial punch bowl. The financial market bubble, inflated by stock market exuberance and risk-insensitive emerging market lending, burst under the pressure of unregulated and apparently unmonitored leverage undertaken by U.S. and European financial institutions. The extent of that precariously leveraged state was only glimpsed when, in mid-September, the curtain was pulled back on the Long Term Capital Management hedge fund.

As the experience of the post-1969 and post-1987 periods suggests, when overheated financial markets cool, New York City's economic and fiscal health takes a decided turn for the worse. While it may be that alert action by the Federal Reserve and Treasury officials, and their European counterparts, prevents turmoil in the financial markets from turning into a more severe global slowdown, New York City is vulnerable to the retrenchment in financial markets that is already under way; as well as to the heightened risk of a macroeconomic weakening.

Within the first two months after the market plunge in late summer 1998, several financial firms announced job cuts, among them: Merrill Lynch (3,400), Bankers Trust (1,500), Salomon Smith Barney (200), and Prudential Securities (200), with many of these occurring in New York City and its immediate environs. In addition, a host of banks and brokers sharply curtailed their emerging market investment units. Third-quarter profits for the eight largest Wall Street firms, all New York City-based, fell 60 percent compared with the average level for the six prior quarters. Expectations for year-end bonus payments ratcheted down with each new layoff notice, which dampened Manhattan's upscale housing market. The commercial real estate market paused for a few months as financing dried up for many deals, and financial firms scaled back operations.

New York City's short-term fiscal picture has benefited from the Wall Street-induced tax windfall of recent years and cautious city-budget planning based on the city's own forecast for a moderation in economic activity. However, if economic conditions deteriorate beyond that envisioned in the city's economic outlook, which does not factor in a serious Wall Street or macroeconomic downturn, the city will face a much harder time closing budget gaps that range up to $3 billion over the next four years.