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Wall Street Puts a Chill on Economy

12/09/2007

This analysis is overly optimistic in its job analysis for 2008. The 27,000 number for 2008 job creations will probably be reduced significantly if the current real estate weakness continues. This article fails to address the 50% increase in oil prices over the past year. That is going to be factored into an economy that will see significant weakness in 2008. Ed Klein

WALL STREET PUTS A CHILL ON ECONOMY
By Tom Fredrickson
CRAIN’S New York Business
December 9, 2007

http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20071209/REG/312090028

New York City's economy is about to get a gut check.

After three years of prosperity, 2008 is going to look very different. Job growth will be cut in half, cyclical industries will suffer and some businesses will have trouble borrowing money to expand.

The chief culprit will be Wall Street, which has already started to lay off workers and where the fallout from the subprime mortgage meltdown and credit crisis bedevil some of the city's largest financial firms.

"It's the old thing," says Jonathan Lindsey, managing partner of legal recruiter Major Lindsey & Africa. "When Wall Street sneezes, the economy catches cold."

Job growth is expected to be 27,000, versus 55,000 this year, according to an estimate by Crain's New York Business. The securities industry will see a net reduction of about 6,000 workers in New York next year. That's on top of the local share of the 8,000 job reductions that financial firms with significant operations here have recently announced for 2007.

In a city where Wall Street accounts for 5% of the workforce but 23% of personal income, the ripple effect will be profound. Another 12,000 jobs that are tied indirectly to Wall Street will vanish through a combination of layoffs and attrition--from accountants who rely on business from investment firms to nannies for the children of Wall Street managers and executives.

Some law firms who feed off the Street have already started cutting back. Thacher Proffitt & Wood and Clifford Chance are taking the scalpel to specific areas, including structured finance and mortgage securitization.

In addition to the changed picture on Wall Street, general economic sluggishness will take its toll in New York. Other industries that are highly sensitive to the economy, such as advertising and residential construction, may lose steam.

A host of businesses in all kinds of industries, including the small businesses that account for many new jobs, will also curb hiring because they will have less access to bank credit.

"Banks get cautious when things slow down," says Tom O'Brien, chief executive of State Bank of Long Island. "That tends to feed on itself."

As the economy decelerates, the city's commercial office market will feel the effects.

"I think we are on the cusp of seeing more space coming on the market because of the downturn," says Robert Sammons, an economist and managing director at commercial real estate firm Colliers ABR Inc. As the vacancy rate increases, rents will decline--as will the eye-popping prices being paid for Manhattan skyscrapers.

Some countervailing forces might allow the city to hold up better than in previous Wall Street-led downturns. New York is enjoying a strong boost from foreign investors and tourists. As the result of the weak dollar, they are finding many bargains, from fashion to real estate.

Foreign investment

"New York City has incredible cultural assets and is a desirable place to live and visit," says James Parrott, senior economist at the Fiscal Policy Institute.

The impact of foreign money could have an influence on both the intensity and the duration of the downturn. But Wall Street, more than any other sector, will dictate the city's destiny.

"The big question is if we are going to see a 1987 to 1991 scenario [of extended weakness], or something more like 1994 or 1998, when the turmoil lasted only a few months or quarters," says James Brown, an economist with the state Department of Labor.

Mess may last

The downturns of 1987 to 1991 and 2001 to 2003 were extended because investors had to wait for huge speculative excesses in commercial real estate and tech stocks, respectively, to unwind. The 1994 slump, caused by a crash in the bond market, turned out to be short-lived, as did the 1998 scare that arose from the Asian financial crisis.

So far, however, few signs have emerged that the mess caused by runaway speculation on mortgages and financial derivatives will be a quick fix.

COMMENTSTFredrickson@crain.com

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