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Big Apple starting to crumble

 

NYC-Skyline-1.jpg

 

Janet Whitman, Financial Post Published: Thursday, November 06, 2008

 

NEW YORK -- The Big Apple is losing its shine.

 

After years of benefiting from consumer bingeing on everything from luxury lofts to US$99 hamburgers, New York is seeing a dramatic turn in its fortunes as Wall Street stumbles.

 

Investment banks and other financial-services firms here have cut tens of thousands of high-wage jobs and many more pink slips still could be on the way as they grapple with the deepening credit crisis.

 

This year's Wall Street bonus pool, which makes up the bulk of the pay for high-flying financial executives, is forecast to be chopped in half to US$16-billion.

 

Businesses are already feeling the pinch. Revenue at some high-end Manhattan restaurants are down an estimated 20% this year and the once sizzling real-estate market is cooling fast.

 

New York City Mayor Michael Bloomberg said this week that the big drop in tax revenue collected from financial firms is forcing him to renege on planned US$400 property tax rebates for homeowners and to mull a 15% income tax hike.

 

Economists said yesterday that the downturn could resemble New York's financial crisis in the early 1970s, when the city nearly went bankrupt and crime rates skyrocketed.

 

"Compensation is going to be way down and that's going to weigh on restaurants and retailers and the housing market as well," said Mark Vitner, senior economist at Charlotte, N.C.-based bank Wachovia Corp. "We're going to have a very difficult climb back out of this. The recovery might begin in the middle of next year, but that just means things will stop getting worse."

 

Mr. Vitner said it could take at least three years before New York starts to see strong growth and five years before the city gets back to normal.

 

After the dot-com bust in 1999 and the Sept. 11 terrorist attacks, New York soon roared back, fueled by Wall Street's recovery.

 

But the city can't depend on Wall Street this time around.

 

"The flavour is different," said James Brown, a New York state Department of Labor regional analyst who focuses on New York City. "It's not clear how much growth we can expect from our financial sector in the next upturn. We don't know to what degree they may not be as profitable and able to lavish the same high salaries in the next boom as they have in the past booms."

 

With the U.S. government looking to avoid sowing the seeds for a future financial crisis by cracking down on executive bonuses and limiting how much financial firms can wager, Wall Street's recovery could be slow.

 

That's bad news for New York State, which depends on the financial sector for 20% of its revenue.

 

The state already is facing its biggest budget gap in history, at US$47-billion over the next four years.

 

The crisis last week prompted New York State Gov. David Paterson to ask U.S. Congress for billions of dollars in federal assistance.

 

New York City has been particularly hard hit. For every Wall Street job another three or four will be lost in the city.

 

Despite the doom and gloom, Mr. Bloomberg assured New Yorkers at a press briefing this week that the city wouldn't return "to the dark days of the 1970s when service cuts all but destroyed our quality of life."

 

The mayor, who is seeking a third term to guide the city through the crisis, said New York is in much better fiscal shape than it was then and won't make the same mistakes.

 

Still, he warned, it could be as many as five years before financial companies have to start paying city or state taxes again because of the half a trillion dollars in write-downs they have taken, which will offset future profits.

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