History Hints a Recession Would Hit City Hard
Federal officials may still be debating whether the American economy will fall into a full-blown recession this year. But economists in New York City are pondering another question: If there is a national recession, how deep will it get here?
If the last two recessions are any guide, economists say, the city could be headed into a wrenching reversal that will last longer than the national downturn. Though by many measures the city’s economy is still chugging along even as the nation’s sputters, there are troubling signs: Business-tax revenues and the number of building permits are dropping while unemployment and office space availability are creeping up.
Perhaps most important, big investment banks continue to report losses on securities tied to mortgages, causing the elimination of thousands of high-paying jobs on Wall Street, with many more layoffs in the works.
James Parrott, the chief economist for the Fiscal Policy Institute, a liberal research group, said he believed the city had been in a recession for months. Employment in construction has already started to decline, as it usually does at the start of a recession, he said. Retail sales would be following suit, he added, if not for the surge of foreign tourists taking advantage of the weak dollar.
Once the layoffs on Wall Street start rippling through the city’s economy, Mr. Parrott said, “it’s going to take something unforeseen to prevent us from having a massive job loss.”
The situation has worsened enough that the New York City Independent Budget Office, which said a month ago that it expected a brief and mild recession, is preparing a forecast that is likely to be significantly bleaker, said Ronnie Lowenstein, the director.
The local economy, she said, “will be considerably worse than it is now.”
Still, predicting downturns is risky work. Every recession has its own personality, and the city’s sprawling economy has reacted differently to each one. More dependent on Wall Street and more closely linked to the global economy than the rest of America, the city has been battered harder by recessions that started in the financial markets than by those that began in manufacturing.
Looking to history for clues about how New York might fare in a new recession, economists note that the city suffered more and for a longer period than the nation as a whole during the last two downturns — at the start of the 1990s and in the early years of this decade.
So far, however, no one is forecasting a recession that would rival the financial disaster that the city endured in the 1970s, when it teetered on the brink of bankruptcy. That crisis was the most severe downturn in the city’s fortunes since World War II.
In 1973, the national inflation rate already was rising when the supply of foreign oil was disrupted. High interest rates, combined with falling productivity and rising unemployment, led to a condition known as stagflation.
New York City fared much worse than the rest of the country. Unemployment and the crime rate soared as 600,000 jobs were lost. Several large corporations, including General Electric, packed up their headquarters and decamped to the suburbs, or farther away.
By the spring of 1975, the city was on the verge of defaulting on its debts. The State Legislature created the Municipal Assistance Corporation, which borrowed billions of dollars to keep the city afloat. (Experts widely believe the city’s finances, even in a weakening economy, are much better today, with projections of a surplus of more than $4 billion this fiscal year.)
When the next national recession struck in early 1980, followed by another in mid-1981, New York City was still rebounding. Nationally, that downturn spurred thousands of business failures, many of them manufacturers. But the city’s manufacturing sector had already shrunk markedly, leaving it with less to lose, economists said.
As a result, those recessions were considered relatively mild in New York. In 1982, when the national unemployment rate had risen to 10.8 percent, it was 9.8 percent in the city.
The next two recessions, however, were largely about Wall Street and what it financed — and so New York felt the pain.
In the mid-1980s, the city and its growing financial sector were on a tear. The stock market was rising steadily, and big investment banks like Morgan Stanley and Salomon Brothers were growing from tightly held partnerships into big public companies. A building boom took root. Office buildings and condominiums sprouted across the metropolitan area, many of them financed by the aggressive lending of savings and loan associations.
By mid-1987, the city had added back about 300,000 jobs, and its unemployment rate had fallen below 6 percent. Personal incomes were rising along with the stock market. The city’s median family income increased by more than 15 percent during the ’80s.
Then the stock market crashed in mid-October 1987, wiping out all of the year’s gains in a single day. But its dire effects were not immediately felt.
The city’s economy continued to expand, along with the nation’s, for two more years. But the growth masked the cutbacks that had begun on Wall Street, where the banks had been eliminating jobs throughout 1988.
With Wall Street in a tailspin, a downturn was well under way in New York when the national recession officially began in July 1990. Two years later, the city’s unemployment rate had risen to more than 11 percent.
That national recession officially ended in 1991, but the downturn lingered in New York, for another year and a half by Mr. Parrott’s estimate. Corporations continued eliminating layers of management in what came to be known as the first “white-collar recession.” Before it was over, one of every 10 jobs in the city — about 360,000 in all — were lost.
The city did not begin to recover until 1994, when another financial boom began, this one culminating in the mania for dot-com stocks. The dot-com party came to an abrupt end in March 2000. This time, the job cuts started not on Wall Street, but in computer services. Employment in data processing and other business services fell fast, but overall employment in the city continued growing until the end of 2000.
Then came the devastating terrorist attack on Sept. 11. About 80,000 jobs were lost in the 15 weeks after the attack, turning what had been a mild downturn into a deep recession. Travel and tourism-related businesses suffered even more than financial services.
Officially, the national economy pulled out of that recession at the end of 2001. But the city kept shedding jobs until 2003, eventually losing more than 225,000.
What lessons, then, do those downturns hold for economists parsing the current economic troubles?
Economists say the post-9/11 recession is less instructive because of the anomaly of the attack and its localized impact on the economy.
But some economists see parallels in the current situation to the recession of 1990, as both were preceded by easy and abundant credit.
Although the current national slowdown began with the bursting of a housing bubble in Sun Belt states, the city could again remain in recession after the national economy recovers because Wall Street firms financed much of that lending, economists said.
Mr. Parrott described the borrowing of recent years as “excessive,” saying that aggressive mortgage lending and the leveraged trading of mortgage-related securities inflated the bubble.
Ms. Lowenstein said: “Even if it didn’t start on Wall Street, Wall Street is very much involved. Given the difficulties we’re seeing in the financial sector, it’s hard to imagine that we’re not going to see some fairly significant losses that could well exceed what’s happening in other areas of the country.”
Though job losses on Wall Street this time around may not rise as high as during the last two recessions, she said, the damage could be equally severe.“There may be fewer financial-sector jobs lost, but each job is very much more valuable,” Ms. Lowenstein said. “The loss of those jobs has a much greater impact on the economy because they are so well-paid