The stock market is buoyant. The national economy is no longer in free fall. And in New York, epicenter of the financial crisis, things are finally looking less grim.
Although job losses continue to mount on Wall Street, as they do nationwide, New York officials are revising their employment predictions to reflect less actual damage as banks and other financial firms show improvement. And while few are quick to trumpet it, a rise in banker bonuses—so roundly criticized in Washington—is likely to further speed the city's recovery.
Just as New York entered the recession later than the rest of the country, it is expected to lag at its exit. The city's unemployment rate rose in June to 9.5%, matching the nationwide average, from 8.9% in May. That's quite a climb from the 5.4% rate of the previous June. But the city's Independent Budget Office, the publicly funded agency that tracks the city's budget, is projecting that actual job losses will not be as bad as anticipated. In May the IBO changed its estimate of 2009 job losses for the city to 141,000, down significantly from its March estimate of 185,000. The change for May was due in part to an annual revision—called "benchmarking"—of employment data by the New York State Labor Dept., which indicated that the total number of jobs in New York City had increased in 2008 by more than was previously thought.
Q2 Bank Earnings Turned Up Sharply In the financial sector, the IBO now expects that 70,000 total jobs will have been lost during the financial downturn—calculated from the peak of employment, in the first quarter 2008, to the trough, now expected to come in the third quarter of 2012. That's down from a March forecast of 92,000. "We've been bringing the forecast down not because the U.S. downturn has been milder than anticipated, but rather because we haven't seen the sorts of job losses locally," says Ronnie Lowenstein, the IBO's director. Lowenstein expects total employment to turn up by the second half of 2010, while financial jobs will continue to decline through the first quarter of 2012. "Most sectors hit their trough and begin to peak well before that," she says.
The renewed vigor of some of the big New York banks is no secret; it was reflected in their second-quarter earnings statements. Net income at Goldman Sachs (GS) surged to $3.4 billion, from $1.8 billion in the first quarter, while Morgan Stanley (MS) emerged from the red with $149 million in net income, up from a loss of $177 million, and JPMorgan Chase (JPM) reported a $2.7 billion profit. Proprietary trading and mortgage-lending activities led the way to improvement.
"If things continue to improve, that certainly is going to brighten the outlook," says Michael Jacobs, supervising analyst in the economics and taxes unit at the IBO. "It seems to be happening quicker than we expected."
Bond traders and banking analysts make six-figure salaries that can easily stretch into the millions with bonuses, and those well-compensated jobs contribute a disproportionate share of New York's wages and tax revenues. Financial services account for approximately 10% of the city's total private employment—but 35% of wages—according to the New York City Economic Development Corp. The recession cost the state $1 billion in personal income tax revenues and New York City $275 million in 2008 alone.
Bank Bonuses Will Lag 2007 Levels Last week, bankers were slammed in a report by New York State Attorney General Andrew Cuomo for handing out rich pay packages while they were taking billions of federal bailout dollars. Cuomo's report said Goldman alone paid bonuses of more than $1 million apiece to 953 traders and bankers last year. But, according to New York State Comptroller Thomas P. DiNapoli's office, total cash bonuses paid by Wall Street firms to their New York City employees slid 44% in 2008 to $18.4 billion, from $32.9 billion in 2007.
This year is likely to see a rise in Wall Street pay. Based on recent activity and analyst expectations, compensation analyst Alan Johnson of Manhattan-based Johnson Associates expects payouts at the big investment and commercial banks to rise by 30% to 40% for 2009. Goldman set aside $11.36 billion for employee compensation and benefits earlier this month. Most banks will still be well below their 2007 bonus levels, Johnson says.
Because each financial job supports an estimated 2.2 jobs elsewhere in the city's economy, according to NYCEDC estimates, the financial sector meltdown that began last summer quickly spread throughout the city, hitting advertising, consulting, and law firms, as well as limo services, florists, and restaurants. "New York City from a business perspective is a one-industry town," says Johnson. "To repeat the hackneyed phrase, when the financial industry gets a cold, this town gets pneumonia. If the financial industry doesn't recover, New York City won't recover."
Startups Can't Compensate for Layoffs Economic development officials say they are "cautiously optimistic." "We're pleasantly surprised that the numbers aren't as bad as we anticipated, but there's still the potential for things to fall through the floor," says Ann Li, an NYCEDC official. In fact, values of offices and other commercial real estate are still plunging and could prove problematic for banks. And fresh layoff reports continue to filter in, such as the 270 positions cut from Hartford Financial's (HIG) investment products division and Citigroup's (C) outsourcing of 500 data processing jobs. Citigroup has already blown past its projection, made at the height of the turmoil in November, that it would cut more than 50,000 jobs, or 14% of its total workforce worldwide. Including the divestiture of some assets, Citi has shed 96,000 jobs since its 2007 peak.
There is an upside to the mass departures from the big banks: Some fleeing bankers are injecting new life into Wall Street, with boutique banks and such startup firms as former Meridian Equity Partners strategist Michael McCarty's hedge fund and former UBS (UBS) manager Brian Singer's investment management firm. But this crop of newcomers doesn't come close to offsetting the lost jobs and tax revenues. "Startup hedge funds employ 10 people. Investment banks have gotten rid of thousands," Johnson says.
Wall Street will continue to come under scrutiny for its pay practices. President Barack Obama's call to realign compensation and bonuses to better match performance and discourage short-term risk has a receptive audience in Congress and elsewhere. Still, the disposition of the companies Johnson advises on pay has gone from "terrified to cautiously optimistic" since the last quarter of 2008 and first few months of 2009, he says. The reluctance to hand out handsome compensation packages "seems to be waning. Now we're just in normal bad times but it doesn't look like we're going into the abyss."
Johnson predicts that 2009 should mark the bottom for the financial sector. "If New York City can make it through 2009, it should be able to come back up," he says.