NY Fed Economic Outlook on NY/NJ

"Although the New York–New Jersey economy shows tentative signs of stabilization, a number of factors make it likely that the region’s recovery will lag the nation’s, just as it has in the past. First, this economic cycle is characterized by unusual restructuring in the financial sector. Ongoing consolidations, mergers, and financial firm closures suggest that employment in the sector may not return to its previous cyclical highs. Additionally, future regulatory changes could limit the permissible lines of business, pay structure, and size of firms. The form, shape, and timing of these forces are unknown, but they certainly have the potential to dramatically reshape this sector and play an important role in the region’s recovery — particularly New York City’s.

Second, state and local fiscal pressures could delay the regional recovery. As we observed earlier, the financial sector can account for as much as 30 percent of all earnings in New York City. The job and income losses in this sector and in related supporting services, as well as the more broad-based cyclical job losses attributable to the national recession, have already led to a sizable plunge in state and local income and sales tax collections. Such declines are likely to continue and to be exacerbated by steep reductions in mortgage-related tax revenues, reflecting the drop in home sales, and decreases in capital gains and corporate tax collections, reflecting a weaker economy and stock market(fn: The possibility of tax-loss carry-forwards for financial corporations makes a drop in corporate tax collections all the more likely). These decreases in tax revenue have helped create a bigger budget gap, which states and cities typically seek to remedy through a combination of tax increases and spending cuts — measures that can crimp regional economic activity. [nota bene: http://online.wsj.com/article/SB125424963214850111.html ]

Third, employment growth in the private education and health sector has historically contributed some stability to state and local economies, because the demand for these services is not closely linked to cycles in the regional economy. However, the current downturn is characterized by such severe gaps between projected tax revenue collections and projected expenditures that state and municipal governments are instituting cuts in aid to these sectors. Thus, continuing job gains in health care, although possible, now appear more questionable. Finally, even if the national economy were to rebound in the second half of 2009, many analysts anticipate that a recovery in U.S. employment will trail the general economic recovery. All of these factors, coupled with the New York–New Jersey region’s historical tendency to lag the nation when emerging from a recession, point to a period of sluggish activity for the region even as the U.S. economy begins to recover."