In almost every respect, the financial crisis has been the most severe downturn in a generation. In terms of its legacy as well, it will almost certainly prove to be among the most significant economic events in recent American history. The consequences of the recession have already proved far-reaching, ranging from our changing view of the role of government in housing markets to the enormously higher debt burden that now threatens the nation’s long-term prosperity and growth potential.
Notwithstanding this broad brushstroke characterization of the downturn, the extent of disruption and subsequent rebound has varied tremendously across the national geography. In New York City, the recession was less severe than in many other large markets, in spite of the shocks to the city’s keystone financial services sector. The most current data also suggest that the city is well on its way to recovery, albeit not at a pace that matches the rebound in Manhattan commercial real estate investment.
Fed’s Economic Index Points Up
According to the New York Fed’s Coincident Economic Index, which aggregates measures that relate to current economic activity in New York City, the most recent recession was less severe than the one that preceded it. This contrasts starkly with national statistics, which show a milder recession at the beginning of the last decade.
The 2001 recession saw activity here decline by 8.4 percent from peak to trough. That downturn and slow recovery were relatively protracted, with 57 months passing from the beginning of the recession to the return to previous peak levels of activity in late 2005. In comparison, the recession beginning in 2008 saw activity decline by 7.4 percent from peak to trough. Using a linear extrapolation of the current trend rate of expansion, i.e., assuming no improvement or diminution in the pace of recovery over the next year, the city will have fully recovered its last peak in activity in approximately 45 months, a year earlier than before and well ahead of most peer markets.
A range of measures, from tourism to the volume of trade, supports the inference that conditions are improving in New York. The flow of goods into and out of the region’s ports, for example, has recovered most of its losses from the recession. The Port Authority of New York and New Jersey reports that container traffic in 2010 reached 5.29 million TEUs (20-foot equivalent units), up 16 percent from the previous year and only slightly lower than the 5.30 million TEU record high in 2007.
Our Distinguished Labor Market Resilience
While the Coincident Index shows that New York experienced a shallower downturn during the financial crisis than it did following the 2001 recession, that comparison is complicated by significant shocks internalized by the local economy during the prior period. Given the unique nature of each recession, longitudinal comparisons are necessarily qualified.
Comparing the current recovery across cities offers an alternative metric for assessing the pace of New York’s health. And, in this respect, New York’s stronger trajectory is even more evident.
According to the Bureau of Labor Statistics’ seasonally adjusted tally for April, the city has recorded net increases in employment for 13 consecutive months. Job growth in the city has been recorded in the financial services sector, in contrast with other markets, where the national statistics show the industry struggling. The city’s overall gains have offset a significant share of the employment losses that were already more modest than for the country as a whole, beginning later in the recession and reaching a nadir earlier. While the city labor market has been flat in the most recent reports, it is conceivable that it will recover all of its recession losses in 2012, two to three years ahead of the national labor market.
Explaining the Turnaround
How has New York City managed to best the broader labor market downturn, despite a recession rooted in the financial system that is a foundation of the local economy? For all of Wall Street’s protests regarding the recent invasiveness of government, its intervention in support of large banks and other financial firms has been a critical factor in supporting the city’s employers and the economic multipliers associated with their activities.
Another supportive factor has been the city’s long-term move to greater diversification away from financial services.
As for risks going forward, continued uncertainty relating to the evolving regulatory environment for banks and other financial services firms remains a critical qualifier. The passage of Dodd-Frank is only part of a much larger process of remaking the financial services landscape in the United States. Depending on the political winds, that process may reverse or it may develop greater momentum, particularly as concerns retail banking and the consumer relationship.
Investors who have already capitalized current fundamentals gains into property prices should take note that policy may prove a fickle friend in this regard.
Sam Chandan, Ph.D., is global chief economist of Real Capital Analytics and an adjunct professor at the Wharton School.