During past economic downturns, New York City has tended to reemerge at a slower pace than the rest of the country.
Economists explain the lag by pointing out that the city’s biggest industries are service providers such as financial, law and accounting firms whose clientele is located nationally and that the rest of the country therefore has to reach a point of recovery before it direct business back to the city and jump-start its economy.
This recession however, though deeper and more startling than those that preceded it in recent decades, has proved different. The city’s economic health didn’t appear to unravel as severely as many originally anticipated and it has been quicker to rebound.
A report released Friday by the New York City Independent Budget Office on the city’s budget, highlighted this fact by pointing out that economic growth in the city is “now coinciding with the nation’s economic recovery,” not following it, as it typically does by a year or more.
From the third quarter of 2008, when the national economy was sliding rapidly into the recession’s darkest depths amid a systemic crisis in the financial sector, to the fourth quarter of 2009, when the economy finally seemed to be stabilizing and showing signs of recovery, the city lost 140,000 jobs. The decline in employment, while serious, has been about half of the dire original estimates given by the city.
Seemingly in synch with the national employment picture, which showed two consecutive months of solid employment gains in March and April for the first time since the downturn took hold, the city too has begun to add back jobs. The IBO report projected that the city would gain a total of 29,200 jobs in 2010 and another 30,800 next year, modest but nonetheless encouraging increases that appear poised to pick up in subsequent years. The IBO predicts that the city will add about 65,000 jobs a year from 2012 to 2014.
“At this rate, the city will regain its previous employment peak by the third quarter of 2013,” the report stated.
Either because of the bailout or due to the fact that it has become such a central nerve of commerce, the city appeared to dodge the worst of the recession. Yet the city wasn’t spared other hallmarks of the recession’s severity. The IBO noted that wages have dropped more precipitously than during past downturns, by about 4.8 percent according to the office. In the recession of the early 2000s, earnings fell by 1.0 percent and by about 2.2 percent in 1993, when the city was grinding through the last of a years long downturn that hit the commercial real estate market particularly hard.
The IBO report also noted that Wall Street bonuses will likely sink, earnings that pad the city’s tax collections and stimulate economic activity by stoking consumer spending.
“IBO forecasts $29.0 billion for 2010 and, for subsequent years, more modest levels in the $14 billion per year range,” the report said of bonuses. “But securities wages are projected to regain only a small portion of their declines in 2010 and do not appear poised to return to the breakneck growth exhibited prior to the crisis.”
As is evident by the slimmer layoffs, there has been less vacancy in the office leasing market. The IBO report even stated that there could be need for an addition to the city’s inventory of office space because there has been so little addition to supply in recent years.
“Real estate markets now seem to have stabilized, setting the stage for renewed expansion, though the timing remains uncertain,” the report stated.
The IBO said that the reemergence of the city’s economy will fuel an uptick in tax revenue for the first time since the recession took hold. The IBO projected that taxes will generate $36.2 billion in revenue this year, an increase of 4.5 percent over last year, and $38.3 billion in 2011, another increase of 5.2 percent and $1.9 billion higher than an earlier estimate by the office.
The IBO report said that the city will end this fiscal year with a $3.4 billion surplus, $101 million more than Mayor Michael Bloomberg predicted in his executive budget earlier this year, that it can pass along to help plug a potential deficit in 2011, which the IBO predicts will end with a smaller surplus of $356 million. Uncertainty haunts the city’s fiscal health beyond next year however, especially as state officials, including Governor David Paterson, have propsed reducing important state contributions to the city’s budget. A preliminary state budget submitted by the governor this year for instance cut off nearly $1.3 billion in funding to the city.
To cope with the possibility of lower contributions, Mayor Bloomberg has proposed laying off 6,400 teachers and a host of other spending reductions, including $1.1 billion in cuts among city agencies in 2011, in order to pair spending.
The issue over just how deep the reductions in state support will be hasn’t yet been resolved because Albany has been unable to pass a budget for the next fiscal year despite it being due originally in April.
The city’s 2012 budget gap, as projected by the IBO, could grow if $853 million in federal stimulus dollars are not extended to school funding that year, a pot of money that the Mayor has said will determine whether the city has to potentially cut 14,000 teachers. The IBO notes that the state’s own deficits will continue to yawn and that in 2012, it may have to cut more than the $1.3 billion it is proposing now in the aid to the city, putting further pressure on the city’s financial situation.
“There are considerable uncertainties to the local forecast. To close its massive budget gaps, will New York State resort to some combination steeper cuts and larger tax increases than those already factored into our forecast?” The report questioned.
The city and state’s budget situation could require both to levy higher taxes, potentially to the detriment of the economic recovery.
The IBO noted other uncertainties. Regulatory overhaul could deal a blow to the city’s top revenue generator, Wall Street and many economic experts fear that the brewing debt crisis in Europe could yet wash up on American shores.
“Will the fallout from sovereign debt crises overseas impart new destabilizing shocks to U.S. financial markets and institutions? How will the revenue and payroll of the securities industry be affected by new regulatory standards and taxes?” The report asked. “New York City has a particularly strong stake in how all these uncertainties are
resolved.”