Projected Wall Street job losses bode ill for Connecticut
A new report predicting 10,000 job losses by the end of 2012 and a decline in profit margins for Wall Street’s securities industry has economists, business leaders and state legislators anticipating ripple effects here, both for Fairfield County’s financial services sector and for the state budget.
And while opinions were mixed over just how severe those effects might be, there was consensus Monday that the impact would be negative.
“Ominous,” said Edward Deak, a Fairfield Univeristy economist, in response to last week’s report from the New York State Comptroller’s Office projecting job losses on Wall Street would reach 10,000 by the end of the 2012 calendar year. That same report also warns that pre-tax profits for New York Stock Exchange member firms, which were less than half in 2010 of their record-setting level in 2009, should drop another 35 percent by the end of 2011.
“That certainly translates into slow job growth in Connecticut in 2012,” said Deak, who also serves as Connecticut model manager for the New England Economic Partnership, which produces a semi-annual regional forecast. And with most economists already predicting meager job creation numbers here for next year, this latest development could mean “job growth may be stalled entirely,” Deak added.
“Wall Street recovered quickly from historic job losses in 2007 and 2008 — greatly aided by the intervention of the federal government — but it still faces significant challenges,” the N.Y. comptroller’s report states.
Factors such as the European debt crisis, a national economic slowdown and new regulatory changes — particularly those restricting year-end bonuses for traders — not only have stopped Wall Street’s recovery, but once again have the industry headed in the wrong direction, it said.
Members of the stock exchange earned $27.6 billion last year, less than half the nearly $62 billion they reported in a record-setting 2009. Profits fell further in the first half of 2011. And given advance reports of a poor third-quarter performance at several major firms, New York officials are projecting profits won’t reach $18 billion by year’s end, representing a drop of another 35 percent, and a two-year plunge of 70 percent.
“In response, the industry has resumed downsizing,” the report states. “It now seems likely that profits will decline sharply from last year’s level, job losses will grow and cash bonuses will be smaller.”
Since April 2011, the securities industry in New York City has lost 4,100 jobs and that could reach 10,000 by the end of 2012, the report states. That could stretch to 10,000 jobs by end of 2012 and industry employment would be down 17 percent since January 2008.
If so, industry would have lost 32,000 since January 2008. This would represent a contraction of 17 percent. And about one out of every 10 of those lost jobs, Deak estimated, involves a Wall Street employee who resides in Connecticut.
Further complicating matters, the report adds, “Additional job losses are expected in banking and other parts of the financial services sector. … Such developments would have a ripple effect through the rest of the local economy and hinder recovery.
“I use that as the canary in the coal mine,” Deak said, echoing the concerns of ripple effects and predicting they certainly would reach into Fairfield County’s financial managers, banks and hedge funds. “They would likely face the same types of cost pressures ands concerns.”
Deak predicted the predicted Wall Street contraction, if realized, would have a “restricting impact” not only on Connecticut’s private sector, but on a state budget that relies heavily on its financial services sector for income tax revenue. “Some of those earnings aren’t going to show up in the budget because they are not being generated.”
“I think that is an inevitable conclusion,” said Don Klepper-Smith, chief economist at Data Core Partners in New Haven.
“We’re experiencing the law of unintended consequences,” Klepper-Smith said, referring federally mandated compensation reforms that accompanied the Wall Street bailouts of the last recession. Specifically, as federal lawmakers restricted companies’ ability to hand out large year-end bonuses, firms responded by increasing base pay — and reducing staff.
Though it remains unclear exactly how deeply it might pinch Connecticut’s tax revenues through the remainder of this fiscal year, which ends June 30, “we’re going to have to be careful with every dollar we spend.”
But a key official at the Business Council of Fairfield County said it’s difficult to read how this trend might affect Connecticut’s southwestern corner.
“I don’t know what to make of it,” Joseph McGee, vice president of public policy for the council, said Monday. “Clearly the relationship of the financial services sector in Fairfield County is linked to New York City. We will probably follow suit.”
But McGee quickly noted that “we’re not seeing that (contraction) at this stage, so we’ll have to watch.”
McGee added that Gov. Dannel P. Malloy’s decision in August to commit $20 million in incentives to UBS — a global financial services firm — in exchange for a pledge to guarantee a Stamford work force of at least 2,000 for the next five years, was important. UBS currently employs about 3,500 people in Fairfield County. “The state is going to have to continue to be very aggressive in terms of outreach to that industry,” he said.
University of Connecticut economist Fred Carstensen, who heads the university’s Center for Economic Analysis, agreed that “there is a strong likelihood there is going to be a decline in tax collections in Connecticut in 2012.”
But Carstensen added that Malloy has positioned itself well to combat these losses, with its emphasis on focusing major state financing on school, road and other public works construction projects. “Malloy’s focus on keeping those shovels in the ground is going to help,” he said.
“I think we’re going to be watching the revenue picture very, very carefully each month,” Rep. Patricia Widlitz, D-Guilford, co-chairwoman of the legislature’s Finance, Revenue and Bonding Committee, said. “We certainly took a large hit the last time around on the revenue side” during the recession. “But I think everyone is very cognizant of what we went through before and we’re better prepared.”
Malloy and the legislature began the term in January staring at a $3.67 billion deficit projected for the 2011-12 fiscal year. That shortfall ultimately was eliminated through a combination of $1.5 billion in new state taxes and fees, about $900 million in projected revenue growth tied to economic improvement, and a spending plan that — while 5 percent higher than the prior year — still fell $1.3 billion below the level needed to maintain current services.
But Sen. Andrew W. Roraback of Goshen, ranking GOP senator on the finance panel, said state government is not as well prepared as some believe. The union concession deal reached in August to help eliminate the deficit prevents the governor from laying off the overwhelming bulk of state workers during this fiscal year and the following three.
Connecticut businesses and households still are struggling with one of largest tax increases in state history, and cannot sustain more if the economy slips back into full-blown recession, he argued. “I don’t know any informed person, inside or outside of state government, who doesn’t face with trepidation the short-term economic situation.”
Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, could not be reached for comment Monday.
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