Gregory J. Heym
Executive Vice President, Chief Economist
Exec. Vice President
By: Walter Hamilton
Like a lot of New Yorkers, Peter Poulakakos is holding his breath. His legendary Wall Street restaurant, Harry’s Cafe & Steak, relies heavily on the normally free-spending financial industry, and Wall Street’s mounting problems from the subprime mortgage crisis are threatening to eat into his bottom line. Business has held up this holiday season, but next year could be another story. “When Wall Street slows, everyone slows,” Poulakakos said. “It’s a tremendous concern.”
The booming financial markets helped Wall Street earn bountiful profits in recent years, which in turn made Manhattan’s economy and housing market the envy of much of the country. But subprime-induced layoffs and suddenly deflating bonuses appear likely to change that. Wall Street investment banks have written off about $75bn in subprime losses, and analysts predict tens of billions more. Investment banks have announced that more than 40,000 jobs will be cut. And year-end bonuses on Wall Street could shrink as much as 15 percent from a year ago.
As a result, the economy of the city and surrounding areas is expected to slow notably, from a 4 percent annual growth rate in 2005 and 4.6 percent last year to 2.9 percent this year and 1.6 percent next year, according to the federal Bureau of Economic Analysis. Manhattan, where most employees of Wall Street companies work, still has a lot going for it. And the weak dollar is prompting foreigners to gobble up high-priced Manhattan apartments and splashy luxury items.
Wall Street’s problems have yet to show up in official economic data, and other evidence of a slowing economy remains primarily anecdotal. Still, there’s a creeping sense among some that the economic nirvana of the last few years is giving way to a period of uncertainty and perhaps much worse, depending on how long the subprime crisis lingers.
The turmoil on Wall Street prompted state officials in October to lower estimated tax revenue for the first three quarters of 2007 by $500m. New York Mayor Michael Bloomberg has imposed a hiring freeze and ordered city agencies to slash spending. Wall Street is central to New York’s economic well-being because, even though it makes up only 5 percent of jobs, it accounts for 23 percent of wages.
The industry’s payroll in the city last year totaled $59.9bn, or more than $340,000 per employee, according the state Department of Labour. A big chunk of that — $23.9bn — came from bonuses, which could fall an average of 10 percent to 15 percent, according to Options Group, a Wall Street recruiting and compensation consulting firm.
One of the biggest question marks surrounds the city’s housing market. Although the housing market in much of the US is well into a downturn, demand for homes in Manhattan, especially at the high end, has remained strong and overall prices have kept climbing. The median apartment price in Manhattan in the fourth quarter through December 11 was $825,000, an increase of 14 percent from the final three months of last year, said Gregory Heym, chief economist at Halstead Property, a residential real estate brokerage in New York.
Nevertheless, the first cracks in the facade may be appearing. The number of homes sold in Manhattan is down sharply. As of December 11, there have been 1,996 sales this quarter, compared with 3,415 in the entire fourth quarter of 2006. Wall Street’s turmoil has caused some would-be buyers to drop out of the market, said Charlie Homet, a Halstead broker. “I’ve heard from several customers, ‘I might lose my job. Now is not the time for me to buy’,” Homet said.
Sunday, December 30, 2007