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How bad will NYC's economy get? History has some answers

By Garett Sloane, amNewYork Business Editor | gsloane@am-ny.com

May 22, 2008

Wall Street is hoping that the national economic crisis will quickly recover and looks to stave off a recession and or depression through assuring investors that the economy remains healthy. (RJ Mickelson, RJ Mickelson / May 21, 2008)

The city has seen epic economic downturns before, from the Great Depression to the fiscal crunch of the 1970s that left the city groveling for federal aid, prompting the famous headline, "Ford to City: Drop Dead."

But today, the city isn't asking for handouts in Washington, nor is it gearing up for a depression--though try telling that to the thousands who have already lost their jobs on the Street. If indeed we can turn to the past to help understand our present meltdown, it may be best to engage in a little bit of 1980s nostalgia.

"There have been four distinct downturns since the 1970s and the one that seems most similar to this one is the S&L crisis in 1987," said Rae Rosen, assistant vice president and economist at the Federal Reserve Bank of New York.

That meltdown began with the jarring stock market crash in October 1987, and lasted into the early 1990s, spreading from Wall Street to Main Street, and crippling the city's real-estate market.

The 1980s meltdown was known as a "white-collar recession," because it broke the trend of economic cycles that used to rise and fall on manufacturing. The pattern today is very much along those lines.

"If you look at the history of recent recessions in the Wall Street-dependent economy, downturns -- this is true at least since 1987 -- downturns begin on Wall Street and it spills over into the broader economy," said James Parrott, deputy director and chief economist of the Fiscal Policy Institute, a think tank with a focus on the city's economy.

The city lost 350,000 jobs during that period, far more than the number predicted to disappear this time. However, in a note of concern, the city's economy is far more reliant today on the fate of Wall Street, where most of the cuts are happening so far. Wall Street employment makes up about 5 percent of the workforce but about 25 percent of all wages earned; that figure was only 9 percent in the early 90s.

Today's job losses and lost wages will lead to a decrease in revenue for the city, but the city is fundamentally in fine financial shape, according to the mayor's budget and the Independent Budget Office.

"The city proactively put money away to help deal with a rainy day," said Ronnie Lowenstein, director of the Independent Budget Office. According to her office's forecast, released Tuesday, there won't be any budget shortfalls in 2009 or 2010, while the mayor's budget predicts only a modest shortfall in 2010.

But the best-case scenarios are still bleak and dependent on national forces that are beyond the city's control.

"At this moment we're still doing better than the rest of the nation as a whole," Lowenstein said. "But we don't know if that's going to continue."